Whilemany investment lessons and ideas ponder on asset allocation, goal-mapping, and risk appetite, they only addresses the most basic. While it certainly serves us the initial action plan or to derive an investment policy statement/philosophy, it won’t get us to the nuts-and-bolts of executing the plan. That’s only the beginning of the investment journey, and the actual dirty work remains elsewhere.

Once the investment plan is in place, for instance, the asset allocation mix is in place, and now we get down to shortlisting the instruments. The classic, transparent, and convenient way is to build through mutual funds. So, how to pick the right funds from the plethora of offerings that fit to your requirements. This is a work in itself, similar to the initial exhaustive exercise of the investment planning.

The crude and most common way is to mimic a friend or a known person. The most frequent question I’ve ventured is what’s the flavor of the season, or which fund to invest. There’s no background of the need description or goal timelines, but just to invest in a fund. The other frequent way is to pull out the top performers list as on a date, comparing over periods of 1-yr, 3-yr, 5-yr, and more.

True, the very reason for any investment is to make money, i.e., higher returns, but its like comparing a car based on the fastest to reach 0 to 100kmph. Would that allow you to make up your mind? How then do we arrive at zeroing down on a fund to invest?

Chasing returns wouldn’t end us with better returns but could expose us to higher risks than we might desire or tolerate. So, one should first begin with their risk profile.

If the risk is conservative with shorter timeline requirements, then debt or debt-oriented funds would address the need. That way, we’re aligning the risk, goal, and time periods. If the risk is moderate with a relatively lengthier period, a hybrid fund could suffice the need and an equity fund for longer time and moderate to aggressive risk profiles.

And how many times do we see the same fund(s) at the top, across multiple timelines? There’s a seasonality of fund returns, like many of the sportsmen. It’s only a few who perform over longer periods that become great and remain etched in our memory. Similarly, we need to check for not just performance but consistent ones to consider in our portfolio within the suitable category.

If one were to check the performance comparisons, one could find suddenly a new fund top of the list with spectacular returns suddenly and then fade away after a few months or quarters. It might never again feature in the top-quartile, even.