SIP: All you need to know

'Since inception' numbers are comparable
It is a common practice to evaluate equity-oriented funds by comparing their performances over longer time frames like three and five years. At times, investors are known to draw conclusions based on 'since inception' performances. 'Since inception' refers to the growth clocked by a fund since its origin.

The fact: 'Since inception' performances are not comparable, simply because not all funds have the same inception date. For example, a diversified equity fund launched in 1995 can be compared with another fund launched in 2002 over the 3-Yr and 5-Yr time frames. However comparing their 'since inception' performances would be inappropriate because the first fund has a 13-Yr track record while the latter has been in existence for 6 years. A fund's performance since its inception can at best be considered for drawing comparisons vis-�-vis the benchmark index (i.e. by considering a corresponding period) to evaluate its relative performance.

Thematic funds make good investments
This is likely to be the most disputed misconception. After all, most thematic funds have delivered superlative performances over the last 18-24 months. Let's not forget that just about every fund house worth its salt is launching thematic NFOs (new fund offers) and that includes fund houses like HDFC [Get Quote] Mutual Fund which were always averse to the idea. Clearly, the worthiness of thematic funds cannot be doubted.

The fact: All the hype surrounding thematic funds doesn't change the fact that they are high risk-high return investment propositions. Furthermore, such funds can deliver only so long as the underlying theme does well; once the theme runs out of steam (every theme does at some point in time), so does the fund. And given the restrictive investment mandate of a thematic fund, the fund manager has no option but to stay invested even in the aforementioned scenario.

Conversely, there are diversified equity funds that invest in an unrestricted manner. By not being tied down to any specific theme, they are free to seek attractive investment opportunities across the investment universe. Statistics reveal that over longer time frames (more than 5 years) well-managed diversified equity funds are known to score over their thematic peers. More importantly, diversified equity funds are known to outscore their thematic peers on the risk parameters i.e. they expose investors to lower risk levels.

At best, thematic funds are suited for informed investors who can time their entry into and exit from the fund. Retail investors should stick to diversified equity funds with proven track records over longer time frames and across market phases.