'For the serious investor, this study on funds will hold more utility as a learning experience'

For at least four years now, mutual funds - especially equity mutual funds - have not received much enthusiasm from investors. Like any other equity-related asset, high returns have been hard to come by and there has been little reason for new investors to get attracted to mutual funds in large numbers.

However, it looks likely that we are on the cusp of a change in this situation. Despite all the gloom and doom, there are many underlying positives in the Indian economy and businesses. There are no guarantees of course, but it is important that investors re-orient themselves to steady and regular mutual fund investing. In this context, mechanisms for the evaluation, grading and ranking of mutual funds become very important.

During the heady days of 2004/2008, many mutual fund investors did their finances great damage by investing blindly in the flavour-of-the-day funds, generally driven by the sales hype of the fund companies and the commissiondriven entreaties of fund salesmen. That was the worst possible way of choosing funds. The choice of which fund to invest in has to be driven instead by data, analysis and a process that incorporates all this.

This annual exercise that Value Research conducts jointly with Business Today is designed to do just that. However, the most important part of this exercise is not the end result - the actual identity of the funds that turn out be at the top of the heap (or the ones that don't) but the division of the funds in different buckets - the very concept that different types of mutual funds serve different needs. For many investors, the process of choosing the right mutual fund to invest in begins (and often ends) with the question: "Which is the best fund to invest in?"

This question cannot but yield the wrong answer, except by chance. The right question is: "Which fund should I invest in?", and the most important word in that question is not 'fund' but 'I'. Any hunt for the most suitable investment must begin not with an analysis of the options available but one's own needs. To twist the saying, 'Investor, Know Thyself.'

There are not just a huge number of mutual funds available, but a large number of types of funds available. Are you someone who has just started working and doesn't have any specific responsibilities? Are you a corporate CFO who needs to park extra cash for a few days? Are you an imminent retiree who will need a regular income combined with reasonable stability? Or are you a high-income executive who doesn't mind a bit of risk? First, you must identify what type of fund is suitable for you.

Therefore, the right way to approach Business Today's annual Best Mutual Funds study is to remember that the individual funds must be seen only in the context of the different categories under which they have been evaluated. It will make little sense to zero in on the best liquid fund when you actually need a hybrid fund.

The second important thing about actually utilising this feature is to focus less on the minutiae of the ranking but more on the process we have followed. Generally speaking, rankings, awards and grading are an important part of any process that selects investments. However, small differences in rank or grading are more reflective of chance, than a reliable guide to the future. In any well-designed process, the inherent difference of quality between a number one and a number two has little meaning, especially for how they will do going ahead. For the serious investor, this study on funds will hold more utility as a learning experience, rather than a precise recipe to follow.

The author is CEO, Value Research