Mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutualfund investment are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors.
Types of Mutual Funds for Mutual Fund comparison
- Diversified equity funds
- Index funds
- Opportunity funds
- Mid-cap funds
- Equity-linked savings schemes
- Sector funds like Auto, Health Care, FMCG, IT, Banking, etc
- Mixed/Balanced funds
Selecting a mutual fund is very important before Mutual Fund comparison
Today many websites and magazines offer performance statistics, fund fact sheets, quarterly news, etc. on all the mutual funds in the market. This knowledge should be used to understand which fund matches your risk appetite. While evaluating the funds, look for consistency in delivering the stated objectives in past performances. Like one would diversify their equity investments, one should also diversify mutual fund investments to spread the risk further. Keep track of the fund charges.
It’s important to establish here that best funds for your portfolio does not mean the best in returns, but rather the one most befitting your risk profile and fund objectives. The most myopic decision that mutual fund investors often make is to choose funds based on recent performance.
But there are several ways for mutual fund comparison.
Check the Ratings
Some investors consider only the star ratings given by various research agencies. But this is just one parameter in a larger scheme of things. Look beyond the ratings for a more efficient mutual fund comparison.
Chart the Performance Overtime
We’re not saying that you overlook the recent ranking altogether. There is always some learning in the way stocks are behaving. But you need to be extremely observant of long-term performance and its ranking amongst the peers.
Check out the quartile ranking that charts out the way the fund has performed quarter on quarter amongst its peer group. This ranking covers 25% of peer group schemes in each quartile. You may want to select the scheme that has been on the top quartile for maximum time. Unless your scheme’s ranking falls consecutively till the 3rd quartile, you have no reason to worry. But if it does, it might be a hint for you to withdraw. These rankings can be found on the factsheets of various AMCs and also on some mutual funds research websites.
Start conducting ratio analysis
You must start measuring Mutual Funds risk, meaning the risk and return ratios for effective mutual fund comparison. Alongside these ratios, you must also check out the ALPHA of the fund. ALPHA is important as it tells us the extra amount generated or the loss incurred by the fund manager from a given portfolio, in comparison to the benchmark. Simply put, ALPHA is the performance ranking of the fund manager. Obviously, you would look out for positive ALPHA scores in the last few quarters and continue tracking the score’s consistency over the period of your relationship with the manager.
Total expense ratio
This parameter is extremely crucial while doing a mutual fund comparison. The fund bears all fund management and distribution related expenses. This clearly means that high expense ratio will affect the fund’s returns. Though mutual fund’s total expense ratio has been capped by SEBI, still lower the number the better unless we get some extraordinary return by paying higher expenses for fund management.
Check the fund manager’s experience
The fund manager is the chief orchestrator of your fund and his review should be done thoroughly. You might argue that the fund just follows a pre-defined process but the fund manager makes the final decision and that where his experience makes a huge difference. After knowing who the fund manager is, trace his past records and the performance of the funds he’s managing.
Scheme asset size
This parameter is different for debt and equity schemes since the asset size differs in both. However, less AUM in any scheme is very risky, as one doesn’t know about the investors and their quantum of investment in a specific scheme. If one big investor exits any mutual fund, the overall performance can get impacted badly, and as an investor you will have to bear the effect. By investing in schemes with larger AUMs, you’ll minimize this risk.
You can never know what to invest in today, for a profitable fund tomorrow. All you can do is stay alert and keep learning for effective mutual fund comparison that yields profitable results.