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How to Select an Equity Mutual Fund for Investment ?

Most people look at stocks like some lottery ticket in their Demat account because the stock they have bought was because their Broker recommended that stock as the next Infosys or their best friend bought that stock and they don’t want to miss out on the multibagger. Buying stocks with such a frame of mind almost guarantees you that you would never be a successful stock investor. When you buy a stock, you really ought to have the mindset of an Investor who is going to buy a running Business and become the owner of that Business. The percentage Ownership in that company represented by your investment size should not change your approach to thoroughly analysing stocks. As investing legend Mr Warren Buffett says, he ideally would not even look at the market price of the stock he is going to consider buying. He would calculate the price of the company stock based on both qualitative and quantitative parameters.

Quantitative parameters would include ratios like Return of Equity, Whether Return on Capital Employed is greater than the cost of capital, Consistency in Sales growth etc. Qualitative parameters would include, first and foremost the Integrity of Management, Accounting practices and so on. Ideally, If the Price calculated by him is higher than the current Market price of the stock, offering him a margin of safety, he likes to Buy such stocks. Only after thoroughly analysing the Financials and Non financial aspects of stocks of Businesses, the dynamics of which he truly understands, does he press the BUY button, otherwise, he is extremely happy to just park his money in safe haven like Government Bonds, T-Bills etc.

As Mr Buffett has taught us, Rule No 1 is Do not lose money and Rule No 2 is Never forget Rule no 1.

To sum up, Only buy stocks of Businesses you understand the dynamics of, known as your circle of competence, generating and expected to consistently generate increasing Free Cash flows and ROEs, being run by Management of high integrity. If you buy a basket of such well run companies, compounding will work it’s magic and wealth will surely come to you.