Scheme Selection — Performance, Consistency, Fund Manager

Picking funds is both an art and a science. New distributors often make the mistake of just looking at the trailing 1-year return and recommending the top performer. That is like choosing a cricketer based on their last match score — the career average, performance in different conditions, and consistency matter far more. The following six-step framework provides a systematic approach to scheme selection: Step 1 — Start with the category, not the fund. Once risk profiling determines that the client needs a flexi cap fund, all flexi cap funds should be compared against each other. A small cap fund should never be compared with a large cap fund — that is comparing apples to oranges. Step 2 — Look at rolling returns, not trailing returns. Trailing 3-year return tells what happened in one specific 3-year window. Rolling 3-year returns (calculated daily or monthly over 5-10 years) reveal what the fund did across EVERY 3-year window — in bull markets, bear markets, and sideways markets. A fund that has beaten its benchmark in 80%+ of rolling 3-year periods over 10 years is genuinely consistent. Step 3 — Evaluate risk-adjusted returns. The Sharpe ratio measures return per unit of total risk — a fund giving 15% return with 12% volatility (Sharpe = 1.0) is better than one giving 18% with 22% volatility (Sharpe = 0.68), even though the absolute return is lower. The Sortino ratio is similar but only penalizes downside volatility, which is more relevant for investors since upside volatility is welcome. Step 4 — Check the fund manager. Has the current fund manager been running the fund for at least 3 years? What is their track record at this fund and previous funds? Do they follow a consistent investment style (growth, value, GARP) or drift based on market conditions? Style drift is a red flag. Step 5 — Examine expenses. In the same category, a 0.5% difference in expense ratio compounds significantly over time. On a ₹10 lakh investment over 20 years, 0.5% extra expense costs approximately ₹3-4 lakhs in lost returns. Direct plans have lower expense ratios than regular plans by 0.5-1.0%, but distributors justify the regular plan expense through advisory value-add. Note: The current TER framework is transitioning to BER (Bundled Expense Ratio) from April 2026, which will change how expenses are disclosed. Step 6 — Review portfolio characteristics. How concentrated is the portfolio? A fund with 30% in top 5 holdings is more concentrated (higher risk) than one with 20% in top 5. What is the portfolio turnover? Very high turnover (200%+) means the manager is trading aggressively, which may indicate lack of conviction or a short-term orientation. Additionally, for thematic and sectoral funds, SEBI has introduced portfolio overlap caps of 50%, requiring distinct portfolio construction.