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A Simple, Yet Powerful Mutual Fund Pre-Investment Checklist

Use the checklist before you make a Mutual Fund investment, and you'll likely save yourself a lot of the pain and heartache that has gone on to afflict lakhs of retail investors in an otherwise fantastic investment product

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Most of us aren't big fans of checklists. They're too simple, too rudimentary, too archaic to be truly effective in helping us achieve anything, we think. And yet, as renowned surgeon and writer Atul Gawande successfully argues in his gem of a book "The Checklist Manifesto - How to Get Things Right", the mighty power of the unassuming little checklist extends well beyond medicine.

From aviation to high-rise construction to investment banking to venture capital, the checklist is making a comeback, and with startling results. Checklists are helping save lives in the operating room, increasing flight safety measures manifold, and ensuring that buildings don't collapse during hurricane onslaughts.

In his ground-breaking little book, Gawande describes how Mohnish Pabrai, a $500 million hedge fund manager, utilizes a simple checklist that helps him narrow down investment decisions. He also describes how Guy Spiers, who manages a $ 70 million fund, uses checklists to beat his own mental demons, specifically the tendency to get sucked into investment decisions based on greed. For those who are interested, this is a continuation of a short take on the pernicious "confirmatory bias" that most of us tend to exhibit. Here's a link to the article:

Truly, few things require more discipline and process orientation than money management - and by that, I don't just mean the tailored Italian suit, thousand dollars a bottle champagne, flying-around-in-a-private-jet-to-scout-investment opportunities kind. I mean the mundane, day to day investment decisions that retail investors need to make. Should I invest in an NFO? Should I invest in 54EC bonds at a 5.25 per cent return or pay the capital gain tax and invest in more aggressive assets? Should I pay off my home loan or invest into mutual funds with my surplus money? Should I buy this new life insurance policy that's being advertised so aggressively? The multifarious money decisions that we face each day are much more complex than we think, with more far reaching effects on our long-term futures than we can actually fathom.

And so, inspired by Gawande's work in part, and for my own long term love affair with checklists in part, I decided to put together a series of "Personal Finance" checklists that could potentially help investors make more sound investment decisions and avoid common money related pitfalls.
Using the checklist is simple. Just check off each point one by one, and do not make the money move in question until you've checked each point off.

Specifically designed for first time investors into Mutual Funds, here's a simple checklist. You may be surprised to know just how much money it could end up saving (or making) for you eventually.

Mutual Fund Pre-Investment Checklist

1. I have taken a basic risk profiling quiz to determine my ideal asset allocation
2. I'm not investing purely based on the past "one-year return" of the fund/ funds or just because "markets have moved up"
3. I have clearly understood the short and long term risks associated with both equity and debt markets
4. I have understood the minimum time horizon required for each investment, and stand firmly committed to them
5. I have studied the historical worst month, worst quarter and worst year returns for each of the funds I'm investing into
6. I've got a fix on the various exit charges and/or lock-in periods associated with the funds I've selected
7. I am making an investment, not speculating on short term market movements
8. I have not blindly trusted my Financial Advisor; I've done my own research too
9. I am investing my own money and not someone else's

And that's it. Nine simple questions with yes/no answers. The rule being, do not sign above the dotted line unless you've answered yes to all of them. Use this checklist before you make a Mutual Fund investment, and you'll likely save yourself a lot of the pain and heartache that has gone on to afflict lakhs of retail investors in an otherwise fantastic investment product.

Tags assigned to this article:
investment mutual funds banking personal finance