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Should you know the mutual fund's investment process?

An investment process is a defined way in which fund managers and their teams, both debt and equity, go about filtering securities available for investment and arrive at a final choice of what they want to include in their portfolio.

As we see, on occasion, mutual fund schemes taking on disproportionate risks and investors getting their money stuck in such schemes, be it equity or debt, there is merit in discussing the reliability of a mutual fund house’s internal investment process. However, does the regular individual investor have the ability to assess this and base their investment decision or choice of scheme on such an assessment?

Asking too much

An investment process is a defined way in which fund managers and their teams, both debt and equity, go about filtering securities available for investment and arrive at a final choice of what they want to include in their portfolio. 

This process includes a lot of technical filters which have to do with information from corporate financial statements and also financial information related to the security price and trading on exchanges. Fund managers design and follow this process with a view to remain objective in their security selection. 

Expecting a regular investor to understand the process, assess its viability and the ability of the fund manager to follow it consistently is really asking for too much.  Plus, in many cases, investors may not have ready access to the process unless they expressly ask for it. 

Part of an advisor’s job is to analyse the merit of a mutual fund scheme in relation to the investment process followed by the fund house. Investors can instead focus on choosing the right advisor. 

Ask your advisor instead

While knowing and understanding the process before selecting a scheme is a relevant and important part of the investing journey, its not possible for every investor to do. Instead what you can do is pick the right advisor. Advisors are better equipped, given their qualification and experience in understanding the technical factors that influence mutual fund schemes. 

Part of an advisor’s job is to analyse the merit of a mutual fund scheme in relation to the investment process followed by the fund house. Investors can instead focus on choosing the right advisor. 

The right advisor is one who is equipped to do this assessment across the spectrum of schemes and categories in mutual funds. 

If you are choosing an advisor who either does not indulge in such analysis or does not present you the filtered list of schemes based on it, then that’s a bigger mistake. 

Mutual fund investment processes are important, but its not important that investors analyse each and every scheme and its investment process. At the same time, remember that return is a result of risk taken and don’t jump to just choosing the highest return scheme either. 

So, should you know the investment process? Not really. The best service you can do your investments is to get a qualified advisor who does this filtering for you. 

 

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