Parameters to Consider while Selecting Top Funds for Retirement
No mutual fund literature is found complete without mentioning the phrase 'past performance is not an indicator of future outcomes' (or some variation thereof). Then, one might wonder, how considering this factor can help in creating retirement corpus with mutual fund investments? Let’s find out!
Whenever you go through any article on investment tips, there are high chances that the advisor suggested looking at the investment style, strategy, past returns, track record of the fund manager, and other related factors. Considering these points collectively, it’s clear that they all are (somewhere) pointing us to check the past performance of the fund when investing for a longer horizon, say for retirement.
What’s the Real Issue?
Investors often confuse between past returns and past performance. The past performance of any scheme is not just the measure of its past returns; it includes a basket of other subjective aspects as well. These can be the fund manager’s strategy, fund’s response to falling and rising markets, its capability to produce returns in comparison with other similar products and its benchmark, etc.
How Analyzing Past Performance of the Scheme Helps in Creating Good Retirement Corpus?
Retirement is when most of us lack a fixed income source and seek options which can take care of our basic requirements and provide us financial security. We are required to invest early and for a long-term to acquire the desired wealth for retirement.
It’s impossible for someone to predict a scheme’s future. But a rigorous data-driven approach can help one to make a wise pick than looking at a fund’s performance in the last 1 to 2 years and developing perceptions of good returns.
With an aim to bridge the gap between what’s happened and what lies ahead, and build the desired corpus for retirement, you need to consider these points:
- Investment Strategy of the Fund
Is the scheme follows growth investing, or value investing, or growth at a reasonable price? All of the three have their own merits and can create good returns, but the knowledge of the one you have chosen for yourself can help in forming correct expectations as your commitment is for a very long-term.
- Risk that Fund Manager Takes
A metric called Beta measures the amount of risk that the fund manager takes to deliver the desired returns. Check if the value of Beta is greater or less than 1. If it’s >1, the fund manager is taking high risk and vice-versa. The fund with beta more than one doesn’t make it bad; however, this is something more personal that you, as an investor, should check to determine that the risk matches your profile.
- Performance of Fund and its Fund Manager in Different Cycles of the Market
A fund with high beta may do very well in a bull market, whereas the one with low beta may do well in a bear market, on a relative basis. Therefore, assuming your goal, i.e., building retirement corpus, you should be looking for a mutual fund scheme that performs well in all market conditions because over a long-term period, you will have to experience both bull markets and bear markets.
Measures of Past Returns to Examine Past Performance
- Rolling returns: It is the best measure of a fund’s performance consistency, we look at the annualized returns for a specific investment tenure, on every day over a specified period, and over a very long investment period too covering multiple market cycles.
- Market Capture Ratio: It depicts how a fund performed in upmarket and downtrend and provides useful insights on the risk taken by a fund manager. You can also see how the stock selection of the fund manager performed in different market cycles.
Here, Upward Market Ratio>100%: Fund Manager Beat Benchmark Index in Market Upturns and vice-versa.
If Down Market Capture Ratio<100%: Fund Fell Less than the Benchmark Index in Market Downturns, and vice-versa.
Note: Down Market Capture Ratio can sometimes be negative. Do not worry if it is negative as it implies; the fund NAV went up when the market fell. Negative Down Market Capture Ratio shows appreciable bottom-up stock picking skills of the fund manager.
Best Mutual Funds to Invest in 2018 for Retirement
- ICICI Prudential Balanced Fund
ICICI Prudential Balanced Fund is an open-ended balanced fund which is an ideal product for those who are seeking long-term wealth creation solutions along with regular income option. Thus, the investors get to enjoy the benefits of both ends including growth from equities as well as steady income from debt markets.
- Aditya Birla Sun Life Pure Value Fund
This scheme seeks to generate consistent long-term capital appreciation by investing predominantly in equity and equity-related securities and following value investing strategy. The Aditya Birla Sun Life Pure Value Fund seven-year track record depicts that it has beaten its benchmark in every one of those years.
- Kotak Select Focus Fund
Kotak Select Focus Fund is a large-cap growth-oriented scheme which was launched in September 2009 with a motive of gaining capital appreciation in long-term with low-risk probabilities. Despite its assets spread over the cyclical and sensitive sectors, the Kotak Select Focus Fund has been able to perform outstandingly by generating an average of 15% returns since its inception.
- Reliance Small Cap Fund
It is the most popular small-cap fund available in the basket of almost all the aggressive investors. It is a true-to-label fund which invests primarily in small-cap companies with nearly negligible exposure to the large-caps. The primary objective of Reliance Small Cap Fund is to generate long-term capital growth by investing majorly in equity and equity-related securities of small-cap companies. It was launched on September 16, 2010, and in just seven years, it has delivered an average annual return of about 22.31%.
- Mirae Asset India Opportunities
This scheme of Mirae Asset Mutual Fund aims to maximize long-term capital appreciation by finding lucrative investment opportunities resulting from Indian economic growth and its structural shifts through investing in equity and equity-related securities.
The Bottom Line
We hope that the above-discussed parameters can help you analyze your fund more deeply when selecting it for your retirement. Remember, the more the efforts you put in the accumulation phase, the more you’ll be able to enjoy the distribution phase of your retirement. For more personalized advice on which fund to pick from the list mentioned above, don’t forget to consult our financial experts.
- This Independence Day, Let's Pledge for Freedom from Financial Worries1976 min read Aug 14, 2018
- Are Balanced Funds Better Than Balanced Advantage Funds?2984 min read Aug 02, 2018
- 7 Points to Ponder While Investing in Small Cap Funds7573 min read Jul 19, 2018