Identify financial goals
The process starts with identifying your financial goals. You may be looking to plan for retirement, children's education, a marriage or buying a house. If you have a fair sense of the time frame in which to build the corpus, financial websites can help you plan for the various scenarios, including factoring in possible rates of inflation.
Identifying your risk tolerance is important. If you are young and at the start of your career, you can have an equity-oriented portfolio as you can afford to take a risk in anticipation of higher returns. Those approaching retirement or are retired should ideally have low equity exposure.
Selecting a fund house
The next step is to identify fund houses that have a pedigree in the financial services and provide funds with a consistent track record across all categories. A minimum of five years consistent returns could be a pre-requisite.
Familiarize yourself with the investment objective of the shortlisted funds. Identify whether the funds invests across market capitalization or limits itself to large-cap, mid-cap or small-cap stock baskets. Most financial goals are long term and so it is better to invest in diversified funds that have broad mandates. Also consider the benchmark that the fund follows. It will give you a broad sense of whether the fund is tracking a broad index, such as the CNX 500 or the BSE 200.
You may use performance as a measure to make your final list of schemes. However, also consider consistency in performance over longer tenures, including for three, five and 10 years. Your selected schemes should ideally be those that have consistently beaten their benchmark and compare reasonably with their peers over long periods. You should also be aware that there is no advantage to over diversifying your investments. A maximum of four or five equity schemes in more than enough. A fund manager's track record is also a factor. The longer a manager has been with a fund, the better.
Monitoring your investments is the next step. Don't fall in love with your funds. Ask your advisory or sign up for periodic updates on your investments. Do not be tempted to make changes in the first six months or even a year. If you have followed the steps outlined above, you will not need to make a short-term change.
As long as your investments are giving you the required rate of return, don't change your chosen funds or add funds, especially based on short-term performance. The only reason you will need to consider making a change would be if your selected scheme is trailing your required rate of return for over a year or even two.