There are just too many Mutual Funds. More than 2,000 to be precise! So, how do you choose one? You just have to look at four aspects. #mutualfunds #equitymarket #amfi #investments.
Mutual Funds have become quite popular in the last few years. Data from the Association of Mutual Funds in India (AMFI) shows that Assets Under Management (AUM) of the Mutual Funds industry as on January 31, 2018 stood at Rs. 22.41 lakh crore. The AUM of the Indian Mutual Fund Industry has grown from Rs. 3.26 lakh crore as on 31st March 2007, about six and half fold increase in a span of 10 years!
Not only that, more and more people are investing in Mutual Funds. The total number of accounts (or folios as called by fund houses) as on January 31, 2018 stood at 6.83 crore, while the number of folios under Equity, ELSS and Balanced schemes (where the maximum investment is from small investors) stood at 5.65 crore. Now, the question is whether people are investing in the right funds? Maybe not!
Some invest based on what the Mutual Fund agent says while some others invest in funds suggested by their friends and colleagues. This is not a great way to choose a Mutual Fund. Then, what should you do? Look at the below aspects before you put your money into a fund.
Even though past performance may or may not be sustained in future, looking at the performance of the fund will help you gauge whether the fund is good enough. How should you analyse performance? Choose top performing funds in the category and compare their returns with the returns offered by the fund you have chosen. Your fund has given better returns or comparable returns over a three or five-year period? Then, you can shortlist the fund.
Additional Reading: 5 Tips To Get The Best Returns From Mutual Funds
You can do the same with the fund benchmark. Most funds manage to give better returns than their benchmark. If not, that fund might not be worth looking at. Take the ICICI Prudential Value Discovery Fund, for instance. With a 5-year return of 21.54% and a 10-year return of 16.98%, this fund has outperformed its benchmark – S&P BSE 500. The returns for this index were 15.30% and 7.5% in the last 5 and 10 years respectively. While the average return of this category of funds is at 15.65% for five years, the fund has done much better. You could shortlist this fund as it has performed well. (This fund is available on the BankBazaarinsurance platform).
You should also check out a fund’s returns during bull and bear runs. This will give you an idea of how it has performed during those phases. Fund gave positive returns during bear runs? Then, that fund is worth looking at.
Every investment involves risks. However, the lower the risks, the better for you, especially if you are a conservative investor. Funds having the same returns have the same risks? No! The returns have nothing to do with the risks. For example, equity-diversified funds have lower risks when compared to sector-specific funds. How to measure risk?
Additional Reading: 3 Crucial Mutual Fund Tactics for Retirees
Standard deviation and beta are two data points that will help you measure risk. If both are high, then the fund is likelyto be a volatile one. Think this is too complicated? Then, look at the market capitalisation of the fund’s portfolio. Is the fund investing in large-cap stocks (the biggies of the market)? Then, it is likely to be less volatile.
Fund managers may invest in popular stocks or unknown names. This will be based on the fund’s objective. Understand the objective of the fund and see if your risk profile will match that objective. For example, suppose the fund’s objective is to invest in small companies and you have a low-risk appetite, it makes no sense to choose that fund.
Also, look at the portfolio of the fund. Does it have reputed names? How many funds are investing in these stocks? Is the fund manager changing the portfolio too often? All this information is available online. You can get it from the fund’s quarterly reports.
Investments like Mutual funds come at a cost. The cost is the entry and/or exit load that you pay for the fund. The lower the ratio, the lower the costs and higher your returns. Typically, equity funds come with an expense ratio of 1.5%-2%.
Mutual Funds do require a lot of deliberation, unlike Fixed Deposits. However, since the returns are much higher, the time spent on research is worthwhile. With data on Mutual Funds freely available on the internet, gathering information is very easy. So is investing online!
This article was originally published on LinkedIn.