Choose a mutual fund by its theme, not just price

It's not just the traders who are raising a toast to 2007. The year has been equally fantastic for mutual fund investors who probably had one of the fantastic years in recent times. The bull run in the last four consecutive years has created a fresh set of wealthy investors, thanks to the unprecedented annual returns. The average returns from mutual funds (MFs) have been in the range of 30-40 percent with thematic funds turning up with stupendous performance.

Unlike direct equity stocks, mutual fund investors tend to chase history while choosing their fund. As a result, top-performing funds have been the natural choice for many, particularly fresh investors. While that strategy may not be paying at all times, in boom markets, such mistakes are brushed aside. With markets getting expensive and mutual funds too hitting the new fund offer (NFO) button at regular intervals, the time has come for investors to do some cherry picking.

The time has come for mutual fund investors to get choosier with their funds and the decision to invest in a fund should be determined by its theme rather than its price. Hence, do not get perturbed by the innumerable NFOs in the market and go for a fund only if you are convinced about the theme of the fund. If your portfolio already has such a theme, give the new fund time to prove its performance.

While all diversified funds which are all-season funds should continue to be the core of a portfolio, options for diversification has become wider thanks to global funds. Today, most leading fund houses have a global fund in their portfolio and this could be a part of portfolio for those who are sitting on huge gains, earned over the years. Till now, the argument has been, "why should Indian investors look for a global market exposure when the domestic market is on fire?" The Indian equity market no doubt has been on fire, but so are many other markets particularly in the Asia Pacific region. Hence, it may not be a bad idea to take exposure to emerging markets which are also expected to maintain the momentum, thanks to the global fund flows.

Besides global funds, domestic funds have been quite active on the debt front and for short-term investors, opportunities are aplenty with a combination of bond funds and derivative funds. Commodity could be another sector for investors who have the risk appetite as the sector is expected to do well over the coming year.

Irrespective of the theme, mutual fund investors would have realised that while direct stock picking might have given handsome returns in the short term, it hasn't been a bad deal from MFs in the long term. That some of the funds have managed to double their NAVs in a matter of couple of years is a fact. When markets are on a roll, funds don't lag behind. The only ones lagging, probably , have been sector funds. This once again reiterates the fact that thematic funds have their own share of risk. Irrespective of the choice of funds and corpus , the biggest advantage with a MF portfolio is that it forces long-term strategy on investors, and that is unlikely to change in the New Year.