10 parameters to select the best #equity #scheme.
It’s a hair tearing task to shortlist mutual funds, taking expert
advice, friends’ suggestions, father’s ideology and so on to figure out the
best #equity #mutual funds in India. But, the more you discuss, the more
complicated it gets. I have found my way of selecting the mutual funds with a
little bit of help from the mutual funds fact sheets and the publicly available
information.
I have divided
the topic in simple 10 segments, once we put our shortlisted equity mutual
funds of
our choice,
we just simply need to check if its matching the parameters checklist and we
are done. While investing in equity
funds, we must remember that the investment horizon should be long enough
realise the benefit of equity investment, ideally above seven years. The ideal
way of investing is through Systematic investment plan (SIP) to get cost average
and benefit of compounding.
Before I
begin with the headings, I must explain what a good equity mutual Fund is. It
is the fund which consistently beat the index and stays ahead of the curve. Equity
mutual funds should be considered for long term (minimum 5 years), within
equity mutual fund there are several categories as below, based on the core
objective of the fund. According to Indian system any mutual fund maintains
equity holding above 60% is treated as equity mutual Funds. Every class and
subcategory of mutual funds has a defined objective, hence the returns.
In this
article we intend to only concentrate on the parameters for selecting a right
equity fund.
1. The Fund house and the AUM– I
personally prefer funds from top 5-7 Asset Management Company. So, once I am
sure of the category, I would choose a good pedigree. The volume and pedigree
cannot predict a fund’s performance, but it definitely shows the investors
trust and an established history and record of fund management.
Asset under
management is not true indication of future performance, largest AUM doesn’t ensure
maximum return. However, a good equity mutual fund will have assets over multi
hundred crore. Funds with lower assets may feel stress of volatile market movements
or high redemption pressure. Also, bigger funds will likely have lesser expense
burden.
2. Fund manager – A fund manager is the
person responsible for complete management of the mutual fund. With his team of
analysts and trading desk he ensures smooth functioning, investments, churning
of portfolio based on opportunities and threats in the stock markets keeping up
with the investment objective of the fund. His experience gives an indication
of his working style, and a seasoned manager is assumed to see few stock market
cycles.
Ratios
3. Standard deviation ratio – A mutual fund
scheme is expected to give returned aligned to its bench mark index and its
investment philosophy. The standard deviation ratio indicates the possible deviation
between the historical mean return of the scheme. If a fund has historical mean
return of 10% and standard deviation of 2%, it indicates the fund’s future
return could be 10±2%
4. Sharpe Ratio –Sharpe ratio is an
indicator of fund’s performance compared to the risk taken by it. It captures
the excess return the fund has earned. Higher sharpe ratio indicates better
fund performance.
5. Expense ratio – This particular
ratio gives you an idea how much money is getting into the operational expense
for managing the fund. This is indicated in percentage term in any fund fact
sheet. Though #regulators have capped the ratio, a lower ratio indicates it is
not eating much into the return on your investment. A average expense ratio
could be at 1.5%
6. Alpha: The simplest definition of an
alpha would be the excess return of a fund compared to its benchmark index. If
a fund has an alpha of 10%, it means it has outperformed its benchmark by 10%
during a specified period.
7. Beta: Quite like equity stock the
Beta refers to fund's volatility compared to that of a benchmark. For example
if beta of a fund is 2, for every 10% upside or downside, the fund's NAV would
be 20% in the respective direction.
8. Portfolio turnover ratio – This
particular ratio specifically highlights the churning in the portfolio. Higher
churning indicates higher cost. Until and unless the fund is giving exorbitant
returns compared to its peers and benchmark, it could become a point of contention.
9. Fund rating – No harm in looking at
it once, but it may or may not help with a true reflection and you can skip
this parameter if your fund analysis doesn’t match with their rating. Ratings
are assigned annually and every year the 5star rating changes and their
criteria of analysing could differ from your long term objective.
10. Read the SID
Go to the
mutual fund website and check for fund fact sheet (For example, find Franklin
India Blue Chip Scheme Information document)
2. Check for analysis by few independent websites like –
valueresearchonline, mutualfundsinddia etc.
Do your own homework with the 10 points mentioned above
or any other reference points.
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