To figure out how well the fund has done, you should compare its returns to the benchmark returns. On the market, there are a lot of funds, and they all want your attention. Choosing a mutual fund might seem hard, but if you keep a few of the tips below in mind, you can figure out which one is best for you.
Anil Rego, CEO of Right Horizon, said that investors should look at the expense ratio (the cost of investing), the downside and upside capture ratios (how the portfolio does in bear and bull markets), the portfolio turnover (to see if the fund manager trades a lot), and the fund’s track record in terms of outperforming the benchmark (creation of alpha).
“All these parameters should be looked at individually and then compared with the fund’s category peers. This will give a wholesome picture of the fund,” he said.
Here are some of the most important things to think about when choosing a mutual fund scheme:
Performance and a Look at How Others Do
A fund’s return is simply the percentage difference between its starting Net Asset Value (fund unit price) and its ending Net Asset Value. Returns are useless. Calculating returns compare results. between funds or periods.
Samant Sikka, Co-Founder, of Sqrrl Fintech Pvt. Ltd., advised looking at absolute returns, which show how much a fund has gained over time. Thus, investors should check the NAV once and again for six months, a year, or two years afterward. The percentage difference shows the return over this time span.
“Also, while considering the returns of a diversified equity fund (one that invests in different companies of various sectors), compare it with other diversified equity funds. Don’t compare it with the sector-specific funds,” he added.
On the other hand, you should also look at the benchmark returns, which compare what the fund has earned to what it should have earned. The SEBI, which keeps an eye on the market, requires funds to name a benchmark index. In effect, what the fund is saying is that the benchmark returns are what it wants to hit, and if it does, it can pat itself on the back.
Let’s say that an equity fund is a diversified fund that has chosen the BSE Sensex as its benchmark. In this case, this fund’s returns will be measured against the Sensex.
Price and Cost
If you are investing in a mutual fund for a long time, like 5–10 years, it is important to know what the fees are.
==Expense ratio: This is how much a fund charges you each year to manage your money. Sikka said that funds with lower expense ratios and direct funds can increase compounded returns much more than funds with higher expense ratios.
==Minimum initial investment: This is the least you can put into a fund at first. This could be different for each fund.
Portfolio turnover determines the mutual fund’s annual stock holdings. Turnover rises with the turnover rate. The fund’s expense ratio will rise, which may hurt its performance. Growth funds have a higher turnover than value-oriented funds.
Also, Read:-What is common stock, and what are its different types?
Funds with the correct investing objective and goals should be chosen. Understand that fund risk varies. Thus, before investing in a fund, you must evaluate your desired timeframe and cost.
Sikka said that a portfolio that is not focused on one stock, asset class, or sector has less risk than one that is.
“You should also be aware that there is no advantage in over-diversifying your investments. A maximum of let’s say 2-3 equity schemes is more than enough,” he said.
Fund Manager track record
The track record of a fund manager is also important because it lets you know how big the fund is and how well it has done compared to its peers. The longer a manager has been with a fund, the better he or she can predict how the fund will do in the future.
How well a fund does when the economy goes down is very important. Rates of return since the fund started are not fair to compare with funds that had to deal with bad markets. If a fund has done well in a bad market, the fund and its managers should be praised.
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