Today, lists of top-performing mutual funds are available at the click of a button. Have you ever wondered why is it then that very few investors can create wealth?
The problem lies at the very beginning of an investor’s journey. After all, 9 out of 10 investors begin by asking “which fund” they should invest in, instead of setting up clear goals and focusing on setting up a great investing process for themselves.
Also Read: Investing SOS: Missed Mutual Fund SIP? Must Read What Happens After That
It’s a common misconception that the secret to creating wealth lies in selecting the right stock or fund. As a result, people waste most of their time trying to find tips on where to invest, only to have their investing journeys derailed very quickly once markets turn volatile.
In reality, the secret to successful investing is very boring. It means following a streamlined process that ensures that your investments are customised to your specific investing requirements and goals. There’s no “one size fits all” when it comes to investing – an investment that might be great for one person can be a disaster for the next one.
Unfortunately, most investment advice in the country leads up to the ‘recommendation trap’, where financial advisors make the product their primary focus, instead of customising the plan to the person who is investing. This is the reason why investors end up chasing returns rather than having a goal-centric, unique portfolio-led scientific investment process.
Once you have identified your investment purpose, duration, and amount needed and done the necessary calculations to meet your financial goals, the next step is to identify the right asset class to invest in based on duration, transparency, liquidity and cost.
Most experts agree that for a vast majority of investors, equity mutual funds tick all the necessary boxes to meet their long-term financial goals. However, if you have decided to start investing in one, do not make the mistake of thinking that analysing the past performance of a fund will lead you to make the wisest investing choice. Nothing is farther from the truth!
Since the market operates in cycles, based on probability the best-performing funds of last year have a very high probability of not being in the top quartile next year! Think about it, if it was that easy to choose the best funds, we would all be millionaires, wouldn’t we?
What would be the best way of selecting a fund for your first SIP?
Follow a process; select a great asset management company first based on experience and values. Next analyse their compliance framework and ability to stick to the fund mandate. Post this, look at the pedigree of the fund manager and his past performance of stock picking and generating consistent returns as against the index benchmark closest to the fund mandate.
Do not blindly go by lagging performance indicators published on websites. This is a lot tougher than just googling the “best performing mutual fund” and starting a SIP! But then this is why we say that investing is easy, but creating wealth is not.
Choosing the right way of investing for your unique requirements, and following a scientific process gives you investing resilience – the ability to stay invested despite market volatility. This resilience will make all the difference, by allowing your SIP investment to compound. It is exponentially more important to invest in the right manner than to predict and select the top-performing fund for your SIP.
Your choice of selecting a fund must help you meet your goal within the defined goal time frame. Ideally, you should get an expert to help you identify your goals and help you invest in the funds that align with these goals. Most importantly this expert should keep your interest above theirs and help you not only to invest but also to manage your investing behaviour so that nothing derails you from your investing purpose. Remember, we are our own worst enemy when it comes to investing!
-The author is the CEO of FinEdge. Views expressed are personal.
Comments
0 comment