Money Market

Money Market

Understanding how to select a mutual fund By Prof. Simply Simple TM With thousands of mutual funds to select from, how do you decide which ones are right for you? The most common mistake which investors make is to look solely at past performance of the fund. Markets tend to run in cycles. So a fund thats hot can turn cold. So how do you decide which funds to buy? Follow the following steps

Step 1 : Consider your financial needs If you want to Then you want a fund that seeks to provide Typical holdings of the fund Invest for a goal thats 5 years away Growth of capital Stocks

Receive monthly income Income Bonds or cash investments Invest for current income and growth potential Growth of capital and some income

Stocks that have above average dividends or a combination of stocks and bonds Keep your principal safe while earning some interest Preservation of capital plus some income Money market securities or short tem

bonds Step 2 : Examine the fund house. Select fund houses on which you have enough faith to invest your money. Identify fund houses that have a strong presence in the financial world and provide funds that have a reasonably long and consistent track records.. Check if the fund house has experienced fund managers at the helm, their experience and track record

Step 3 : Look for consistency of returns . Look for consistency in performance over longer tenures like 3, 5 and 10 years. Select schemes that have consistently beaten their benchmark indices and compare reasonably with their peer set over the above time frames Step 3 : Loads and Expense Ratio Loads : You may to pay a fee each time you sell the fund units (Exit Load) Expense ratio is the annual expenses incurred by the funds expressed in

percentage of their average net asset. Lower expenses benefit you in the longer term. Usually, schemes with higher assets have lower expense ratio than that of a small sized fund. Step 4 : Consider volatility Check NAV movement to see how volatile a fund has been. Check the Funds beta, R-squared and other ratios Step 5 : Build a diversified portfolio Select funds that complement one

another in their investment styles. If you own a mutual fund which invests in value stocks, to be properly diversified add funds which invest in growth stocks. An investment style box can help you Large Medium Small ....Market Cap.. ...Style Growth Value

Blend Investment Styles Growth Investing : Invests in growth stocks. These are companies which are expected to generate above average annual earnings growth in future years and entering a period of rapid expansion Value Investing advocates that investors should exploit the difference in price between stock market value and actual value of the company. The focus remains

on the price of the stock. Such stocks have low P/E, low P/BV Hope you have understood how to select a mutual fund. I will be glad to receive your feedback on this lesson to understand if there any gaps. Also if you wish to demystify any other concepts, please write to me about them. Please send your feedback to [email protected]

Disclaimer The views expressed in these lessons are for information purposes only and do not construe to be of any investment, legal or taxation advice. They are not indicative of future market trends, nor is Tata Asset Management Ltd. attempting to predict the same. Reprinting any part of this presentation will be at your own risk and Tata Asset Management Ltd. will not be liable for the consequences of any such action.

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