Many years ago, while interacting with a doctor friend, I learnt that a lot of patients repeatedly make one request – prescribe a medicine that cures fast. However, to this, may friend said that there’s no such quick fixes. This got me thinking, that this paradigm could be a perfect analogy pertaining to investments. Just as there are no good or bad medicines, there are no good or bad funds and definitely no ‘get rich quick’ schemes. The choice of funds depends on the goals with which one is investing. If that does not fall in place, things can go awry. 

While investing, first define your goals. For example, different investment funds need different goals. So, if you are investing in short-term funds, (one year or less) opt for liquid or arbitrage schemes, which will yield about six to seven per cent returns with a redemption time of 24 hours. These are also tax efficient. On the other hand, intermediate term goals that have tenure of two to five years, may be apt for large cap funds. And for mid or small cap funds, the holding period usually spans three to seven years. Thematic or sectoral funds need a period similar to mid cap funds. The equity funds of all kind in general require about three to seven years of investment period for better returns and to manage the vagaries of volatility in the market. Also, if you are looking for funds that are more efficient, choose long-term capital gains over short-term capital gains, which have a holding period of one year.

Debt funds also follow a similar principle. The intermediate debt funds for medium-term goals are fixed maturity plans (FMP) and dynamic bond funds that should ideally be held for a duration of three to four years. However, since FMPs are locked funds, they can be redeemed only after the maturity period and they currently provide a return of about eight to nine per cent compound annual growth rate. But of late, dynamic bond funds have been yielding lackluster returns. If an investor is eyeing an investment spanning three to five years, can opt for hybrid funds, which are a mix of debt and equity and can give a return of 12per cent –14 per cent or even more.

Finally, lets analyse the risk versus returns factor. An investor has to have realistic expectations and avoid taking unnecessary risks, especially in volatile funds. The best way to gauge your risk appetite is to ask yourself, what are your return expectations?

Make sure to review your portfolio at regular intervals and weed out non-performers. However do not choose a fund just on the latest returns; rather look for consistency keeping in mind your time horizon. For example do not evaluate your equity fund just on the basis of one year’s performance. Rather see the three years to five years returns, as that will give you an idea of consistent performance. One year of good performance maybe just a “flash in the pan” and a once in a lifetime performance. What you are looking for is a consistent performer and not the best performance. Do not be in a hurry to abandon the funds that you have diligently chosen in the first place.

Let’s consider an example, say if your return expectation is 20 per cent per annum, ask yourself if you are comfortable accepting a loss of 20 per cent as well (albeit notional) or will it give you sleepless nights? If the answer is in affirmative, then may be you need to pare down your return expectation and likewise your risk tolerance too. The logical return expectation is the average GDP growth in the last five to six years along with the average inflation rate for the same period. That figure should be your realistic return expectation. Any returns over and above this figure should be considered a bonus and not sustainable over a long period of time. Funds have been known to give much higher return but they maybe a flash-in-pan incident or take extraordinary risk by investing in very volatile stocks. After all, if your choices of funds are right and you have matched them to suit your requirements, then in the long run you cannot go wrong with your mutual fund investments.

Happy Investing!

The author is a wealth advisor and Founder, Tangerine Ideas