Check firm's background before investing in MF

The earlier two articles in this series would have familiarised investors with the various types of mutual funds on offer, and identified those that are appropriate for each one's requirements.

Now we come to choosing the best mutual fund on offer, suiting your particular category. There are more than 40 asset management companies (AMCs) in the Indian market, and each offers a wide variety of funds and schemes. So it is necessary to spend some time and effort before putting money in mutual funds (MF).

Whatever category you choose, there are a few yardsticks to follow for identifying the best performers. (Since debt and equity MFs are different products, the yardsticks may differ.)

Past performance

It goes without saying that past performance does not guarantee future results. But it has been observed that funds with a good performance record have mostly continued to do well; while the underperformers have lagged behind.

This leads to the point that no fund remains at the top year after year; so one should avoid chasing the top performers of the day. As long as the fund is amongst the top quartile, it usually serves one's purpose.

Equity markets are especially volatile in nature. In this category it becomes important to study the performance track record over a longer time - say three to five years. This is to ensure that the fund has been through both up and down cycles; and will give a clearer picture of the fund manager's capabilities to handle the market volatilities. Performance over a shorter time may not be a true indicator.