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When selecting a mutual fund, one always tends to look at past returns.

My question is, must I look at a one-year, three-year or five-year return?

Which one is a better option?

- Anooj Behanan

I am assuming you are talking about equity funds.

Equity funds are funds that invest in shares of companies. Hence, by itself, it is meant for long-term investors. Therefore, while investing in an equity fund, one should look at its performance record over a longer time horizon.

Looking at the returns over a period of six months or even a year will hardly reveal anything about the fund. In fact, during an ongoing bull-run -- when share prices shoot up and the overall market sentiment is good -- some of the funds that deliver exceptional returns might turn out to be poor performers over a long time horizon. 

Having said that, I will now venture to say that even this is not sufficient. While it is necessary to look at the long-term returns, one must also break it down to shorter time intervals to see how consistent the fund has been.

Look at the returns that the fund has generated over a period of say, five to seven years, vis-à-vis its peers. Within such a time horizon, you should also look at its performance during shorter time horizons; for example, look at its quarterly or six-monthly returns. Such comparisons can throw up valuable insights as to how a fund has performed during different market cycles.

A fund may do exceedingly well during bullish phases, but also suffer heavy losses during the bearish cycles, when market sentiment drops and drags down share prices.

On the other hand, another might deliver close to average returns across bullish and bearish phases. Both might end up with around the same five-yearly return, but the former has been much more aggressive and volatile.

Such a difference will also get reflected in the standard deviation of the two funds. Standard deviation is a measure of how much the actual performance of a fund deviates from the average performance over a period of time. The first one will have a much higher standard deviation.

Which one you should opt for will all depend on how much of a risk you are willing to take. If you cannot stomach a wildly fluctuating Net Asset Value, then you should go for the one that delivers average returns all through.

In conclusion, I would like to say that while researching mutual funds, returns should form just one parameter for comparison.

Some valid questions would be:

1. Is the fund biased towards large-caps, or do mid- and small-caps form a substantial part of its portfolio? To understand what mid- and small-cap stocks are, read Why mid-caps are hot.  

2. Does the fund prefer to concentrate in a few stocks and sectors, or does it maintain a well-diversified portfolio?

3. Does the fund manager keep changing frequently?

4. How has the fund performed vis-a-viz its peers and the Sensex (or whatever is the fund's benchmark)?

• The best funds may not always be the safest
  

I am 24 years old and till date have been able to save about Rs 1,00,000 in various mutual fund schemes. 

1. HSBC Equity (G)
2. HDFC Top 200 (G)
3. HDFC Premier Multi-Cap (G)
4. Pru ICICI Emerging STAR (G)
5. Pru ICICI Power (G)
6. FT India Taxshield (G)
7. FT India Balanced (G)
8. FT India Flexi-Cap (G)
9. Reliance Equity Opportunities Fund (G)

Do these funds suffice for a balanced portfolio? Must I continue investing in these funds until I am 35, at which point I plan to go for an overhaul?

I also plan to invest in HDFC Taxsaver and Pru ICICI Tax Plan. Do I need more exposure to balanced funds right now?

- Kenneth Pinto

The only concern with your portfolio is that many of your funds are very young and still have to prove their mettle. You have not mentioned how much you have invested in each fund. Assuming an equal weightage, your portfolio looks well diversified across stocks and sectors.

Considering your age and the fact that you plan to stay in for the long haul, we think you can maintain an all-equity portfolio. If you would like to garnish it with a little exposure to debt, you can introduce a good balanced fund in small proportion to your portfolio. You should even consider a higher allocation to mid-caps.

After a few years, you might like to increase the exposure to large-caps, and introduce debt to bring more stability. Read Is investing in blue chips wise?