Most investors are collectors of mutual funds, instead of buying them in a purposive manner to fulfil financial goals. In this interview, Dhirendra Kumar, chief executive of Value Research, a mutual fund rating agency, offers a simplified roadmap for investing in mutual funds. He also discusses with Sanjay Kr Singh the impact on the industry of recent regulatory changes regarding entry and exit load.

How have mutual fund investors fared during the downturn of 2008?

Investors who came into the market towards the end of 2007, the last leg of the bull run, in poor-quality funds have done badly. But anybody who invested regularly, and not at one go, in a fund with a good track record for over five years, is better off.

What criteria should investors follow while selecting mutual funds?

Put only the money that you can spare for the long term into mutual funds. If you are risk averse, invest in a balanced fund. But if you can tolerate risk, invest in two-three good all-cap equity funds. Most other categories can be completely ignored.

Never invest a lump sum amount. You can thus avoid the nightmare of your fund value dropping by 50 per cent. If you invest regularly, even a bad fund cannot do you much damage.

Choose funds that have been able to generate a superior risk-adjusted performance over five years. Valueresearch’s ratings can be a good starting point for finding the right funds. But don’t regard a rating as conclusive. It is a quantitative yardstick that helps weed out bad funds.

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