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ICICIdirect Research Posted on 03:08pm 01-Oct-2019

What is your evaluation theory on investments in Mutual fund?

Mr. Sachin Jain

ICICIdirect Mutual Fund Research Analysts



Investing in market-linked instruments is an effective way to beat inflation, especially through mutual funds. But picking the right fund Mutual Fund given the variety of options available can be a difficult task. Mr. Sachin Jain, ICICIdirect Mutual Fund Research Analyst, helps us decode the way of looking at investment in Mutual Funds. Sachin advocates more on the systematic withdrawal Plan (SWP) for the retired individuals as compared to a dividend plan. Also, he emphasized on Arbitrage Funds that are less risky and have a tax advantage. Read more...

Q.    What factors have to be considered while choosing an AMC? 

A.    An Asset Management Company (AMC) that is well-established and has a long term track record should be considered. It should have a proven track record in managing both debt and equity and also should be among the top 15-20 AMCs. Ideally, a track record of 10-15 years is desirable. Investors should also choose AMCs where all the funds are performing well. AMC that have only 1-2 funds performing well in their portfolio can be avoided. The performance of the AMCs should be consistent across the market cycle and recency bias (selecting AMC which has done well lately) should be avoided.


Q.    How do you evaluate the performance of a portfolio? 

A.    Weigh the long term performance with rolling returns in perspective, avoid comparing absolute returns. Apart from returns, we also consider the volatility in returns, mainly measured by standard deviation, we also look at the consistency of performance across the market cycle. We also look at the consistency of the fund manager by evaluating all the schemes managed by the same fund manager. Consider the track record of the AMC in terms of how other schemes are doing well while evaluating a particular scheme.

Our Mutual Fund research process at ICICI Securities Ltd. includes an extensive quantitative and qualitative analysis of funds across equity and fixed income categories of Mutual Funds.

Our recommendations are based initially on quantitative screening for which pre-decided quantitative parameters are modeled for the quarterly ranking across categories. The parameters include risk-adjusted return, portfolio risk, fund manager evaluation, fund house evaluation, and sector outlook. CRISIL has been assigned as the Mutual Fund Ranking provider for executing the quantitative analysis based on the stated model on a quarterly basis.

The qualitative analysis includes regular meetings and con calls with the Fund Managers. Our Top-down approach includes the Investment Committee Meeting (Meeting between departmental heads of ICICI Securities along with external independent Mutual Fund manager) wherein detailed discussion on equity and fixed income outlook takes place. The discussion aids us in forming our investment strategy and consequently our recommendations. 

We also leverage our Equity Research Team (consisting of Fundamental, Technical and Derivative Analyst) and the institutional Fixed Income team for an in-depth understanding of the markets. 


Q.    What should one keep in mind while going for a Mutual Fund?

A.    A mutual fund is a very effective and powerful tool for retail investors to create wealth and achieve their financial goals. Every financial goal can be achieved through a specific Mutual fund scheme. We have equity mutual fund that provides growth opportunity to its investors through professional, disciplined and experienced fund managers. There are other classes of investments like debt funds that helps you enjoy regular income or invest in FDs in case of products like recurring deposits that are more tax-efficient and give capital appreciation.  There are various Mutual Fund schemes like overseas international funds, sectoral funds/thematic funds which also provide additional options to an investor who wants to invest as per their choice and risk profile.


Q.    If a fund is under-performing for the past 2 years, would you suggest to hold or withdraw and reinvest in another fund?

A.    In Equity mutual fund, the returns should not be the only criteria for evaluating any scheme. Equity mutual fund are supposed to be considered as long term vehicles to create wealth. Ideally, Short term underperforming funds should not be considered as it shows a signal to exit the fund. While evaluating the funds apart from returns other aspects like volatility in returns, consistency in returns, and the reason for the underperforming funds need to be evaluated. 

If the fund manager has long term view on a specific sector and stock, we should continue to stay at the fund manager’s decision on the scheme despite its short term underperformance. The long term track record of the fund manager is very important as it helps us to understand its investment philosophy and accordingly it is easy to find the rationale for short term underperformance.

Understanding the philosophy and investment style is important like market fund manager performance may be skeptical about a specific fund, but the fund managers may not outperform in every market cycle. So as long as the fund manager performance is good over the last years excluding the underperforming years in the market cycle. It is advisable to tarry to the fund managers views and not worry about short term underperformance of a particular fund.


Q.    For a retired individual, which funds would u recommend? And why?

A.    In general, a retired individual should invest in debt mutual fund and use SWP (Systematic Withdrawal Plan) to ensure regular income. Systematic Withdrawal Plan acts as a salary to the retired individuals it allows them to receive regular fixed amounts based on the period (monthly, quarterly, half-yearly, yearly). The proportion of withdrawal should not be more than 9%, as requirements will be less as well the fund should get to grow. SWP is a better option as compared to the dividend plan as they are more tax efficient. In the tax implication, only 10% of the withdrawn amount is taxable. It would be advisable for the retired investors to switch to SWP Plan as compared to a dividend plan.


Q.    Is SIP a better way of investing or a lump sum investment?

A.    Systematic Investment Plan (SIP) is a smart financial tool that helps you build your corpus step by step over a period of time. It is nothing but a regular plan that invests a small amount in a specific fund for a fixed period. Lump-sum, on the other hand, is a large sum of money invested in one go. Taking an example of a yearly bonus a lump sum investment Plan would be the ideal option to invest. A savvy investor, who has good judgment over the market conditions could go for a lump sum plan while the market is performing well. Likewise in the case to those who have no time to invest and track would go for an SIP. Both options are good at its situation and investors should seek their benefits in these plans.


Q.    What are Arbitrage Funds? Who should invest in an arbitrage fund?

A.    Arbitrage Funds is an equity-based fund that tries to capitalize on the price differential of security in different segments of the markets like cash segment and derivative. In simple words, the fund makes a profit based on buying and selling the security, currency or commodity in different markets at the same time. Returns are decent enough in an arbitrage fund of about 6-7%.  Investors with a low-risk appetite could go for an arbitrage fund. As there are more returns earned from the volatile NAV caused by the different market segments, rather than a stable market giving less return. Arbitrage funds can be a good substitute for few investors as they are taxed as equity funds while returns are slightly lower or similar to liquid funds. 


Q.    What is a hybrid fund? Who should invest in a Hybrid Fund? Are they good investment options?

A.    Hybrid funds should be preferred /suitable for all the types of investments giving the fund manager the levy flexibility to change the asset allocation in terms of equity, debt, arbitrage within the mandate of the fund based on his outlook of the market. Ideally, conservative and moderate risk profile should be considered in a Hybrid fund.

However, in general, it is better to either choose pure equity or debt funds. For aggressive investors, it is better to choose pure equity and debt, as pure equity funds help capture the complete growth opportunity and give a holistic growth in equity markets. For long term wealth creation, pure equity funds are better placed as it helps capture complete growth option of equity markets.


Q.    How many mutual funds an investor should hold in his portfolio?

A.    There is no significant rule in terms of an ideal number of funds to be maintained in a portfolio which helps optimum diversification. However, in general, investors should not hold more than 10 funds in their portfolio. Holding more than 10 funds will lead to having lower than 10% exposure in a few funds which will not help in terms of adding significant value to the portfolio. Ideally, the number of the fund should be 5-10 funds in the portfolio and this will ensure that the allocation to individual funds is between 10% - 20%.

Disclaimer: The views express above are of the author and do not represent that of ICICI Securities Limited.