Lot of diversified mutual funds(mid cap or large cap) have exposure to some of the stocks from a huge set of 30 to 40 stocks. For Example, stocks like Reliance, ICICI Bank,SBI, Infosys, HDFC and Axis back are in the portfolios of most of the mutual funds. This means if these stocks crash, NAV of your mutual funds is going to come down.
The above mentioned stocks are good. But what happens when every mutual fund picks this as safe bet, in the bull market. There is demand created for these shares and the share price increases and NAV of the mutual fund increases. We look at them and pick these mutual funds. But alas picking winners consistently is not feasible for event the best of investors or mutual fund managers. Should we think that the growth seen in the mutual funds investment is luck based? Seems so for me.
What should I check to see whether your mutual fund is performing okay?
1. I will check Cash Exposure. High Cash reserve ratio more than 5 to 10%.
2. Expert fund managers can go wrong
3. Funds have limited choices making Mutual Funds also following the herd.Hence Checking MF portfolio is a good bet
4. Looking at the performance of your fund based on past experiences may not work in your favor always
May I should start looking in to index funds now? in index funds, you get market returns for small fee and the fund manager has no choice to choose stocks and has to invest in the sensex stocks. if the index goes up, you are sure to make money and like all investments, if sense goes down, i am down too.