Investments in equity mutual funds are done for long term, but what is the duration of perfomance that should be considered for selection of mutual fund?
Typically, the answer would be if investment is done for long term, the duration for analyzing fund performance for selection should be long. This is correct in a way. But does it make sense to analyze performance of extremely long duration like 10 years, 15 years and beyond.
To answer this question let’s look into a historical decision of SEBI. In october 2017, SEBI did a proper categorization of companies as per the market captialization wherein 1 to 100th rank companies were declared large cap, 101st to 250th companies were declared mid cap and 251st to 500th companies were declared small cap companies.
Now, a mid cap mutual fund has to invest at least 65 percent of it’s AUM in companies ranking from 101 to 250 as per SEBI guideline, and the same applies to other category funds as well.
Before 2017, it was quiet possible that a small cap fund has more exposure to mid cap companies than small cap companies. After the categorization of companies as per the market cap ranking by SEBI, mutual funds have become more regulated, and investors need to consider the performance of mutual funds after this categorization by SEBI.
So, considering the categorization which was done in october 2017 (approximately 7 years back), an investor needs to consider 3 years, 5 years and maximum 7 years of performance for mutual fund selection and nothing beyond that.