Mutual Fund selection

"The dumbest reason in the world to buy a stock is because it's going
up" – Warren Buffett

I would say the next dumbest thing would be to buy a mutual fund
scheme just because it's NAV is going up. But that's exactly what the
investors do when they buy mutual funds on the basis of short term
performance. I read an artcile about the (in)consistency of mutual
fund performance.

EXCERPT: "The S&P's Mutual Fund Performance Persistence Scorecard
(link opens a PDF file) measured the consistency of top-performing
mutual funds over three and five consecutive years. As of May 31, only
10.7% of large-cap funds, 9.2% of mid-cap funds, and 11.5% of
small-cap funds maintained a top-quartile ranking for three
consecutive years. Which is to say that only one in every 10
top-performing funds in a given year stays in the top 25% for the next

This is a word of caution for the investors who think that they are
making intelligent decision than the people jumping directly into
markets. After all, if you fall from 10th floor it hardy matters if
fell from the window or you were inside a lift which fell 10 floors.

The article further goes on to suggest that you should carefully note
the expense ratio of the fund. As per the author, one of the golden
rule is "If you are investing in mutual funds, look for funds with an
expense ratio of less than 1%".
In India most of the equity funds have expenses ratio higher than 2%
which means that Indian investors have more reasons to worry.

Read the complete article at.
Beware of Dogs

If you want to know more about expense ration read the following post
Expense ratio : The indicator of Mutual fund costs

Posted:Oct 10, 2005

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