Why is studying a Mutual Fund’s Portfolio necessary?

There are roughly 350 Equity Mutual Funds in the market. Selecting the right ones can be pretty complicated. Since we cannot handle complicated stuff, we resort to simpler measures even if they are incorrect and inadequate. The current method for selecting a fund is based on past returns, i.e. whether it has beaten its benchmark and peers. This way of looking at returns is like driving a car looking at the rear view mirror.

Selection based only on past returns is misleading, inadequate and risky. Misleading, because it has the biases of when you started and how the markets are doing at the time of measuring the performance. It’s inadequate because it does not tell us how much risk the fund manager is taking and whether it provides meaningful diversification in your portfolio. It’s risky because funds that give the highest returns today have stocks that are overvalued and hence more likely to correct or stagnate.

So it if not just past returns then how do you select the right mutual fund? We wrote this blog post to give you a better way of selecting and investing in mutual funds and recommend you read it. The purpose of this post is to answer why you should pay attention to the fund’s portfolio and how it leads to better decisions.

Your objective of investing in Equity Mutual funds ( you probably have 3-7 of them) is to ensure lower risk through diversification and right asset choices and higher-than-benchmark returns now and in the future i.e Alpha.

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