Do not change your Mutual Fund quickly

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I had been lucky with the choice of my first pair of running shoes. I managed to get one that suited my posture and comfort perfectly. A year later it was time to change as the soles wore out. The idea of change brought some excitement. Even though the Asics Gel Kayano I had was good enough, I began research for something better. I found what I thought to be a better shoe at an even better price. What a deal! I had nailed this change.

Six months into running with the new pair, I developed a persistent pain in my foot. Soon I was limping a bit. It confirmed what I had felt for some time, the shoe I researched and thought was better, actually wasn't a good fit. I should have remained with the good-enough pair. The risk of sustaining an injury with an unsuitable pair of shoes, it dawned on me, was simply not worth taking.

It got me thinking: are we guilty of wanting change for the sake of it? Often the desire for change can overlook the proportionate risk that comes with looking for something  better than one that is already working just fine. Have you found yourself reviewing your investment portfolio at the end of a year with the thought of replacing some current holdings with funds or securities that offer potentially more returns, better performance? Making investment choices, be it a review of existing funds or fresh investments, is predisposed to starting with a peer group performance comparison. I too am guilty of this first step of glancing through returns. However, before making a final choice, a broader analysis follows: other factors like fund house processes, fund manager ability, consistency, portfolio attributes and risk are applied. Many times at the end of the process I find the funds that are already there in the portfolio are good enough, and so I have to resist the urge for change.

Why was I quick to change the good-enough shoe but prudently refrain from redeeming the good-enough fund? Maybe I understand risk in the latter slightly better. Running is relatively new in my routine as compared to mutual funds; hence, for me it's an easy decision. For example, I know not to add more in a mid-cap fund despite better performance than say the large-cap peer if I am already over allocated to that segment of the market. Adding another fund will mean higher risk. Sorting through the individual scheme choices is a conscious decision on both risk and return characteristics. With the choice of shoe the decision was harder to make, took several days and I made the wrong choice anyway.

Not knowing the product well enough can lead to wrong choices. Today, many people are investing in mutual funds the money they would otherwise allocate to fixed deposits. The various types of mutual fund schemes do provide a solution for all kinds of investment requirements. However, investing without proper knowledge of risk-return dynamics can lead you to make the wrong choice. For a fixed deposit investor, shifting directly to equity or balanced funds—indicating assured monthly dividend—can hurt when the market corrects. Unless one understands the nature of equity investing and the risks in short-term allocation to equity, this shift may be not sustainable.

Moreover, the starting point should not be about higher returns. Nevertheless, intuitively the first point of reference is always the checking up on relative return: does a mutual fund give more return than a fixed deposit? Is my existing fund good enough or shall I see if I can invest in something with higher returns? Nothing wrong with looking at performance, provided you understand the reason you are investing in a particular product, its characteristics and the risk that comes along.

Think about other factors that can have an impact on your investment journey. Here's the thing, while I realised the wrong choice with the new pair of shoes, simultaneously there were other changes. Each week I had started something we call interval runs, which requires several sprints in short bursts of 500-700 m in addition to a steady long-distance runs. To sustain, I needed to stretch and strengthen leg muscles—which I wasn't focusing on. A kind runner friend advised me correctly, which has helped along with my decision to revert to the original shoe type for my long-distance running.

For fund selection too there are many factors at play. Along with risk and return, be mindful of aspects like your financial goals, asset allocation, the external market cycle and last, the fund portfolio characteristics, fund house and fund manager.

In any discussion on fund selection, I find all arguments lead back to getting the right type of advice. I was lucky to have shared my running dilemma and get the right advice from a more experienced runner and trainer. Seeking out good advice from advisers is a must if filtering through all these factors and risk and return of schemes doesn't come naturally to you.

Changing your fund or investment security just because another seems like an even better one is a decision that can't be based on performance alone. Don't make the mistake I did by getting excited about the idea of change without considering the potential limp it can cause — be it your health or wealth. 

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