Ground Rules of Mutual-Fund Investing

Mutual Funds are increasingly being touted as the retail investors' investment vehicle. But to add to your confusion investing in them not as easy with the wide variety available today. To top it 26 new funds were launched in 2000 alone till now. But the good news is that it gives you choice and the benefit of growing competition service and endeavor to perform. Besides! greater transparency and disclosure is driving greater fund accountability to their shareholders! i.e. you and has also made a relatively safer mar"etplace. The "ey challenge is to choose the right fund. But its simple. #t only re$uires a bit of discipline and little time hardly a cost for a secure financial future. Following are some rules to help invest better and attain your financial goals. Know Yourself% The first step towards achieving your goals is that you must "now yourself. Try to get an idea of how much ris" you can handle. &o a tolerance test for yourself. #f your 's. (0000 investment turning into 's. 6!000 upsets you))even if it could subse$uently bounce bac")) perhaps an aggressive e$uity fund is not for you. Reality Check % *hat are your goals+ #f you need to turn 's (0!000 into 's ,0!000 in two years! a medium term bond fund may not be the right answer. *or" on setting realistic e-pectations for both your goals and your funds. Know Your Portfolio% .oo" for areas that are over)represented and for those that are lac"ing. For e-ample! is your portfolio overly concentrated in the large)cap e$uities or too much of highly rewarding but wildly volatile infotech stoc"s. /re you missing investments in small)cap stoc"s+ Know What You Are Buying% 0nce you discovered yourself! spend some time for a close understanding of your funds. The stated ob1ective of a fund as given in a prospectus is often incomplete and does not reveal much. Based on the readily available portfolio and fund manager's commentary! you can broadly understand the style and strategy followed by a fund. This will help you meaningfully diversify your portfolio. This will also help you assess potential ris"s. #n general! large)cap value funds are less ris"y than small)cap growth funds. Examine Sector Weightings% 2ou must "now that funds with large sta"es in 1ust one or two sectors will li"ely be more volatile than the more evenly diversified funds. .oo"ing at a fund's sectoral history will help you gain a good perspective. &oes the manager move in and out of sectors fre$uently and dramatically+ #f so! the fund might get hurt! if the manager is ever caught on the wrong foot. Check out Your Fun !s Concentration% / portfolio with 1ust 20 or 30 stoc"s or one that puts most of its assets in 1ust a few stoc"s will li"ely be more volatile than a fund that's spread among hundreds of stoc"s. But there could be rewards of concentration. / concentrated portfolio will also get more bang for its buc" if its stoc"s wor" out. 2ou may want to add a concentrated fund! one that owns fewer stoc"s or puts most of its assets in the top (0 or 20 stoc"s! to your portfolio. But largely! your core funds should probably be well a diversified and more predictable. Though a small allocation to a sector)oriented fund! a more)fle-ible fund! or a more)concentrated fund could boost your returns. Assess Performance A""ro"riately% 4ast performance is no indicator of future results. #nvestors should commit this statutory $uote from mutual fund prospectus! advertisements and any other literature to memory. #t should be recalled more readily than your ban" account number. #t should be repeated anytime you consider sending money to any fund with a (005 three)month gain.

*hy+ 6hances are that a few months of boom will be followed by bust! as it has happened this year. /ll the #67 concentrated funds! which were topping the charts fell flat on their face. There was 1ust no escape when their 8/9s started declining li"e nine pins. *hat should an investor do+ &o not concentrate your mutual fund portfolio or invest in a concentrated fund. /nd! above all! don't focus on short)term returns. *hen choosing a fund! loo" for above)average performance! $uarter after $uarter! year after year. Be A #isci"line $n%estor% /fter you've chosen some funds! stic" with them. &on't be afraid to go against the tide! as often the unpopular groups tend to outperform in subse$uent years. #n other words! small contrarian bets could be lucrative. /nd discipline is the "ey. 'upee)cost averaging! or investing a regular amount of money at regular intervals! tends to add value. *ith a systematic investment plan! you are li"ely to beat the fund returns. Know &ow 'uch You Pay% Money saved is money earned. :o it's always better to pay less than it is to pay more. 7-penses are very important with your larger)cap! lower)ris" funds! and less critical with small)cap funds and other higher)ris" categories. For e-ample! be wary of high e-penses when you are considering bond funds. /nd you can afford to be lenient with the e-pense of a small)cap or a sector e$uity fund. The nuances of mutual fund investing can be endless. But the strength of the mutual fund idea lies in its simplicity. &on't get bogged by the noise and clutter. 2ou could well be on your way to reach your goals by following these basic guidelines and be a smarter investor.