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5 tools for analysing mutual funds to invest smartly
13 Sep 2023

If you’ve already build a mutual funds investment portfolio you definitely know what a mutual fund is.But we leave no stone unturned to make sure you’re thorough with your financial tools before you start investing.

So to reiterate, mutual fund is a collection of stocks and/or bonds. A mutual fund company gathers a pool of money from different people and invests it in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

And if you’re dealing with a diverse and wide pool of mutual fund, you will have to be a pro at analyzing your mutual fund portfolio to clear out the clutter and maximize gains.

Here are 5 effective tools to keep a track of your mutual fund portfolio

1.  Credit Rating

All debt papers that the fund invests in are rated by agencies according to their risk profile. There are special agencies that provide these ratings using their own meticulous methodology. The credit rating can range between AAA for highest safety and D for default. The ratings are usually given in the fund's fact sheet. High rating indicates that the fund is taking lower credit risk. Investors generally opt for debt investment to reduce risk, so they should avoid schemes with too many low quality papers. This rating is for debt schemes only.

2.  Sharpe Ratio

The Sharpe ratio is often used to keep a track on the change in a portfolio's overall risk-return when a new asset or asset class has been added to the mutual fund portfolio. There’s a formula to get this ratio: (Expected Return – Risk-free Return)/ standard deviation

If a mutual fund portfolio is delivering excess returns, the Sharpe ratio explains whether it’s due to smart investment decisions or a result of too much risk. Every portfolio might reap different returns, however, a good investor knows that good investment with higher returns should not come with excess risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed.

3.  Expense Ratio

The expense ratio is the cost incurred by an investment company to operate a mutual fund portfolio. It’s calculated annually using this formula: Total expenses charged by the fund/average assets under management of the fund. A lower expense ratio is great for an investor.

4.  Portfolio Concentration Ratio

This ratio gives a detailed view of where and how much the mutual fund is invested in a diverse market. The value is usually a percentage of the fund's top five stocks or sectors.

5.  Exit Load

A penalty is charged by a mutual fund if you leave the scheme early. This is called exit load. Exit load normally ranges between 0%(for liquid funds) and 1% (up to 1 year of holding in an equity scheme). Investing in schemes with lower exit load is a smart idea. The exit load is charged based on the load structure applicable at the time of investment and not at the time of redemption.


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