How to choose a Mutual Fund

How to choose a Mutual Fund

Based on the investment plan, the category of funds should be chosen from debt, equity or hybrid category. Within a category the right scheme can be selected based on criteria such as past performance of the scheme, comparison with peer set and benchmark, volatility measures and risk adjusted performance of the scheme, scheme size, expense ratio of the scheme etc.
There are some vital parameters for choose a Mutual Fund are mentioned below:

CONSISTENCY IS KEY

A good mutual fund scheme is one that consistently manages to outperform its benchmark over 3-5 years. Look for consistency in performance over longer tenures like 3, 5 and 10 years. Select schemes that have consistently beaten their benchmark indices

RISK-RETURN TRADE-OFF

Investments in most securities come with a degree of risk and if returns are not in proportion to the risks taken, it is not worth going for such investments. A good mutual fund is one which gives better returns than others for the same kind of risk taken. Risk-adjusted returns are evaluated against return given by a risk-free instrument- usually government-backed debt papers or term deposits of banks.

PORTFOLIO DIVERSIFICATION

By its very nature, mutual funds are supposed to provide diversification across different asset classes, stocks, sectors and even geographies. A diversified portfolio has lower risk than a portfolio biased towards a particular stock, an asset class or a sector. You can check the portfolio history of a particular scheme and see if the fund has been historically maintaining a well-diversified portfolio. Look at the monthly portfolio of a particular scheme on the website of a fund house.

DON'T JUST JUDGE A FUND BY ITS NAV ONLY

Never Judge A Fund On The Basis Of Its NAV. Also have a look at the Standard Deviation, Sharpe ratio, Beta, Correlation, P/E Ratio, P/B Ratio and Expense Ratio & also its performance in the bear and the bull phase, and then invest in it. Only judging a fund by its NAV, is irrelevant while selecting the fund as it is the percentage gain or loss that matters.

EXPENSE RATIO

The ratio is the annual expenses incurred by the funds expressed in percentage of their average net asset. To make the choice between two similar funds, you should consider the expenses charged by them. Lower expenses benefit you in the longer term. Usually, schemes with higher assets have lower expense ratio than that of a small sized fund.

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