Mutual funds are a pool of professionally managed funds. These are market linked schemes that offer active risk management and are known help achieve their life’s short term and long term financial goals. What Asset Management Companies (AMCs) owning mutual funds do is that they collect funds from investors sharing a common investment objective and invest this pool of funds across the Indian and foreign economy. Depending on the nature of the scheme and its investment objective, a mutual fund may invest across various asset classes like equity stocks, debt instruments, certificates of deposits, debentures, treasury bills, government securities, corporate bonds, etc.

Several people make mutual funds a part of their financial planning because these are market linked schemes that are known to offer capital appreciation over the long term. Not everyone is born with a silver soon we all have ambitions, dreams and goals that we want to achieve at some point of time in life. The problem with conservative schemes is that they do not offer decent interest rates and are known for offering fixed low returns. Compared to this, mutual funds have offered far better returns in the past. Also, mutual funds offer liquidity. Mutual funds do not come with a lock in period. Investors are free to buy or sell mutual fund units depending on their investment objective and income needs. However, before investing in mutual funds investors are expected to do some background check about the fund in order to conclude whether it has been a consistent performer in the past. A fund’s past performance might highly depend on the management that runs it.

 It is the duty of the fund manager managing the fund to buy/sell securities in quantum with the investment objective of the fund and its goal. The fund managers carefully pick equity stocks depending on the nature of the scheme, its risk profile and devices an asset allocation strategy that might help the scheme overperform its underlying index. There are several factors that go into decision making while choosing stocks for building a mutual fund portfolio. Depending on the mutual fund a manager decides which stocks to pick and in what proportion. For example, for a like equity fund like large cap fund, the manager must pick majority stocks of companies with large market capitalization. That’s because as per SEBI guidelines a large cap fund must invest a minimum of 80 percent of its total assets to equity and equity. Mutual fund managers must abide by SEBI’s norms and regulations while picking stocks for different mutual fund schemes. Similarly, when to comes to aggressive hybrid funds a fund manager must make sure that it allocates only 20 percent of its total assets to the scheme’s overall portfolio. A conservative hybrid fund follows an asset allocation strategy where majority of its assets must be allocated to debt instruments and other fixed income strategy.

A lot of market research goes into the decision making process of selecting funds for specific mutual funds. This is the reason why it is essential individual to make sure that they invest in a mutual fund that belongs to a reputed AMC that hosts a reputable management. The fund managers apply their vast industry experience while buying/selling securities to help a scheme outperform its underlying benchmark. This is the reason why investors must be careful while choosing a fund. One should only consider investing in a mutual fund that has track record for consistent performance. They should not invest in a fund just on the basis of the expense ratio or this decision might turn out to be more expensive than anticipated.

Clare Louise