How To Ascertain Which Mutual Fund Is Suitable?

The most important factor before you choose a mutual fund is to understand your risk appetite. There are various categories of mutual funds for different kinds of investors. But remember that not all mutual funds are equity-oriented.

So, if you are a conservative investor, you may invest in debt mutual funds. However, also note that debt mutual funds may offer returns that are only slightly better than fixed deposits. So, conservative investors should rather go for hybrid mutual funds. A balanced advantage fund, equity savings fund or multi-asset funds in the hybrid category will suit those who cannot stomach volatile stock market moves.

An aggressive investor should consider pure-play equity mutual funds. Even within the equity category, one should understand the difference between large-cap, mid-cap and small-cap funds. If you really have a long-term goal, which is at least 7-10 years away, you should invest in a mid-cap or a small-cap fund. The returns may hit high double digits in these.

So, the first step is to acquaint yourself with different types of mutual funds. Once you have cracked that, the next step is to choose a specific scheme from a specific fund house. This step can play a crucial role in how your portfolio performs.

You need to collect some data to compare different mutual fund schemes from a category. There are various parameters: credibility of the fund house, fund managers managing the scheme, expense ratio of the scheme and past performance. As you calculate the past performance, you need to review the consistency. Quartile analysis works best in analysing returns. Pick up four time periods and rank all schemes in each quartile. Shortlist the best performers featured in all these time periods. Check their expense ratio and get to the final name. Some people also analyse different ratios such as the sharpe ratio, treynor ratio, Jensen’s alpha, standard deviation and beta. These are complex calculations. A quartile analysis is easier to implement.

If you think doing all the analysis is too tough or you do not have enough time to do it yourself, reach out to an advisor for fund selection.

The author is the CEO of Edelweiss Asset Management Ltd.