How to choose an Equity fund !!!!

How to choose an my Equity fund !!!! This is the one question which always comes to the mind to an investor. Will my fund beat the Index??
Yes certain funds do... what qualities do they have in common ???

1. They are cheap.

One of the most common misunderstanding is "Higher returns are the best justification for higher fees" . But in the financial world Decades of research have proven that funds with higher fees earn lower returns over time.
Second Higher returns are Temporary !!! It can change anytime.. But the Higher fee always used to stay , even if the funds performance is beaten consistently.

Though everyone is aware that "The most powerful force in the universe is compound interest."
A small change in funds fee will have a significant effect on your returns.

Can we put a simple math Based on this??
If we consider that 1 Crore Invested in two funds which have similar performance have given 12% appreciation compounded annually with the following different fee structures.

1. High fee fund - 12% CAGR with 2.5 % Expense Ratio for 25 Years = 9.67Cr
2. Low fee fund - 12% CAGR with 1.5 % Expense Ratio for 25 Years = 12.14Cr

This means that somone have given 2.5 Cr for managing his money more efficiently for the same
growth!!! :) Ridiculous right..

2. The managers have biggest shareholdings in that fund.

Make sure that the fund Manager who manages your money have their large part of thier holdings put into the fund. Most of the firms even forbid their employees from owning anything but their own funds. These funds will manage the money as if like thier own money!!!

3. They dare to be different!!!

One of the all times great Investor Peter Lynch, was given the Magellan fund for Management. Magellan fund bought whatever seemed to cheap , Regardless of what other fund . Ones the funds Top Holding was on Chrysler an auto company, where most of the Experts thought that the auto maker to go bankrupt. So do check the holdings of the fund,Whether they
hold same as of all the funds.

Do see that they are aligned with the funds Principle. An equity diversified fund holding 35 % in technology and 30% in finance and only a small part in other sectors is not an diversified fund,In this simply fund manager is taking the risk rather than to be different.

4. They do shut their doors!!!

The best funds more often close to new investors, only allowing their existing shareholders to buy more. That stops the new buyers who want to invest which protects the fund from the pains of asset elephantiasis. It’s also a signal that the fund managers are not putting their own wallets ahead of yours. But the closing should occur before—not after—the fund explodes in size.
So do take care of these!!! This can make you sure that whether MF's are just intrested in their
Business and money or do they care for Investors Money.

So What else should you watch for? Most of us look at

1. Past performance first
2. The Manager’s reputation
3. Riskiness of the fund( Sectoral Remeber .Com crash)
4. Finally at the fund’s expenses.(This too No one giving Importance)

The intelligent investor looks at those same things—but in the opposite
order.

1. Fund’s expenses

Since a fund’s expenses are far more predictable than its future risk or return, you should make them your first filter. There’s no good reason ever to pay more than these levels of annual operating expenses, by fund category.

Diversified Indian equity Equites - 2 %
Index funds - 1 %

2. Riskiness of the fund

The Next filter factor is, evaluate risk.Try to get the prospectus of the fund,You can use value research online which shows a bar graph displaying its worst loss over a calendar quarter. If you can’t stand losing at least that much money in Four or Five months this is not the place for you. It’s also worth checking a fund’s value research online rating. A leading investment research firm, value research online awards “star ratings” to funds, based on how much risk they took to earn their returns (one star is the worst, five is the best). But, just like past performance itself,these ratings look back in time; they tell you which funds were the best, not which are going to be. Five-star funds, in fact, have a bad habit of going on to underperform one-star funds. So first find a low-cost fund whose managers are major shareholders, dare to be different, don’t hype their returns, and have shown a willingness to shut down before they get too big for their britches. Then, and only then, consult their value reseach or Money control rating.

3. The Manager’s reputation

Managers reputation is one of the factor in choosing a fund ,but if you choose a fund because of only his repuataion yet again be carful,Your taking a risk.Because there is always a fair 70 - 80% chance that he will move out to other investment firms.

4. Past performance

This is the least important thing one should look into.Just try to get a good fund.
Don't chase the 5 star rated funds and the top funds of the previous years.
But this should not be reason for you choosing a bad performer, or an yestrdays losers.
Because yestaredays loser never become tomorrows winner.So avoid someone who is having a consistent poor past records.