How to choose Mutual Funds or ETF? (Part 2)

It is clear that many investors are going through DIRECT  way. But are all of them aware of bits and parts of it? I am sure that there are at least 200 mutual Fund schemes available in India. But all of them are not right. Some may make losses, Some may just be there for long time like EKG of ROCK.

So the question is how to choose Mutual Fund or ETF?

First of all there are some difference in between ETF and Mutual Funds. Most basic is ETFs are traded on Exchanges only. Mutual Fund may or may not Trade on Exchange.

Let’s Check all the Aspects.

  • What you need? Portfolio theory in simple way, explain that you my found single stock as risky but with whole portfolio, That one stock is maybe less risky? What is your current Asset allocation. What you actually need is more important. Sometimes, the Risk Reward ratio aka Sharpe ratio may not attractive for you. May be your risk appetite is different for such Mutual Fund or ETF.
  • Same Question in Different aspect, What you need and what suit’s you? There are different types of Mutual Funds. Debt fund, Equity Fund, Sectoral Fund, Hybrid Fund, Balanced Fund, Money Market Fund, G-Sec, ELSS, International Fund, Close Ended Open Ended, Growth Fund, Dividend Fund, Index Fund.. Maybe more Four or Five. Everyone is different. Which type you needed a which is right for your portfolio. It is depending upon next factor
  • Mutual Fund itself is Portfolio Developed by Professional For keeping specific Objective in mind. When you are adding them into your portfolio, you are accessing one Readymade portfolio into your portfolio. What is the effect? Is that’s same which you are expected? Are you having sufficient risk appetite? Many people Invested in Mutual fund and forget them. Though I am not expert in the field, My personal view is to check the performance of market and the scheme. Sometimes there maybe low performance for short time, that’s OK. But if it keeping that same then think to change.
  • Rush for Multi bagger. Just want to mentioned. As of today, HDFC Equity is India’s Largest Mutual Fund with AUM more than ₹ 16k cr. More than $ 2.4 bn. Quite Big. But in its first one or two years, it was worst performer, in fact lost little money. So how much is the right time to be invested in Mutual Fund. Depends on which type you are invested.
  • Many People will tell you many thing about Mutual Funds. Some may say that Active Mutual funs are not good. Some may advice Active mutual fund by telling you Dave Ramsay and Peter Lynch. Many people just forget that if you assume, Berkshire Hathaway as mutual fund, Warren Buffett is also Active Investor. He is not following any index.
  • Rush for Zero load Fund is not Right. But that does not mean you just ignore Cost. Expense ratio can make or break whole portfolio. But as you can see Sectoral Funds always have High Expense ratio. In my opinion, If it is making extra return, only then it is acceptable to pay extra. Cost.
  • My view is add Sectoral fund into portfolio only if you are working in the same fields. Like if you are employee of Oil company or energy company then add that sector. Reason is many of them are cyclical. Keeping tap on them is difficult. But investing and selling at right time, they will make Good wealth.
  • Nowadays there is excessive marketing about SIP. Systematic Investment Plan. It is a very good Idea to keep such plan, I believed, that sometime Investing Lump sum is also not bad. That does not mean I am against SIP. It is great way to investment, makes it easy to invest you in small portion.
  • You may found some people who will tell you that BUY and HOLD is great strategy. Some may give you exactly opposite advice like Don’t fall in love with your stock. My view is BOTH are Correct. Excessive of any ojne is bad.
  • Last but not the least. Don’t invest in any stock which is difficult to understand for you. For me, Steel and Infra, is talking like Greek. But banks and financial companies are good for me.

Many people thinking that As mutual fund is right way to diversifying investment, they can add so many funds without even giving any thought. Last time I listen, One investor invested in 40+ schemes. 

Why? No answers. Something similar

Keeping Cash in hand is very good Strategy but not always. Personally I don’t like any fund holding cash more than 2% for long-term. If they are holding cash then why to go to Mutual Fund?

Case For Investing In International or Global Fund

There is No Problem in investing in Global Mutual Funds. In fact it is far better option to invest offshore then direct equity. But there are some thing which you need to understood.

When you Invest offshore, whole scale is changing. Like Indian, US, Canada, Japan, Maxico, China, EU, Brazil, Russia, South Africa all of them are different. When you are investing from one to another, it is not only Forex but many more. Though Forex risk is big part of it. I am not denying that. If you are sure to make return to cover that extra Risk, then only invest in Direct equity foreign.

Does Size of Mutual Fund matter?

As of this Writing, there are 10 Mutual Fund scheme in India which having Assets Under Management ₹10k cr. Sufficient Large. Many times, Investors asked weather to invest in such scheme or not. Out of that 10, 2 are defiantly Performing Better in the Group. Historically, There are many examples by which is prove, that Even more large mutual Fund also outperformed Indices.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me or @androidashu & @InsideFinanc on twitter