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Are you overwhelmed by the abundant choice of equity funds available in the market? In this article, we discuss the rule you can follow mplement to choose from the existing universe of funds and the suite of new fund offers.
Avoiding future regret
More the choice, more difficult it is to choose a fund. Why? You want to avoid future regret. This is the regret you could face a year from now if the fund you choose today underperforms the funds you considered but did not invest. Small wonder that many individuals do not invest when the choices are overwhelming. More choices are not necessarily better than some.
The confusion is even more when you invest in a new fund offer. What is the difference between a children’s gift fund and a multi-sector rotation fund when both are benchmarked to the Nifty 500 Index? Note, the benchmark tells you the investable universe of a fund. Both funds having the same benchmark may buy similar stocks, though based on different parameters.
One way to select a fund is to base your decision on the benchmark index rather on than the name of the product or its investment objectives. Suppose you already hold a fund benchmarked to the Nifty 50 Index and you are considering buying another fund. You must consider a fund benchmarked to a non-overlapping index — a fund benchmarked to, say, the Nifty Midcap 50 Index.
Overlapping index
A fund benchmarked to the broadest index would be an the overlapping index when added to any fund that you already hold. Why? Suppose you add an active fund benchmarked to the Nifty 500 Index to your existing large-cap active fund benchmarked to the Nifty 50 Index. Your portfolio will have a significant bias towards large-cap stocks as the Nifty 500 Index is tilted towards large caps.
Conclusion
To keep your investment choices simple, invest in a new fund offer if the fund is benchmarked to an index against which no existing fund is available. Also, limit your investments to one fund per benchmark. It is preferable to hold funds with non-overlapping benchmarks. Note, that the entire argument rests on the premise that you want to invest in multiple funds, and you want to self-manage your investments. Alternatively, if you want to keep your investments simple and easy to self-manage, you could consider investing in one passive fund (ETF or index fund) benchmarked to the Nifty 500 Index or the Nifty 50 index.
(The author offers training programmes for individuals to manage their personal investments)
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