How to Pick Best Mutual Fund in India? | 6 - Tips to select winning Mutual Fund.

How to Pick Best Mutual Fund in India? | 6 - Tips to select winning Mutual Fund.

 

 

https://www.youtube.com/watch?v=hCQZcwYbzDU&t=24s 

https://www.youtube.com/channel/UCvIUD03WzMio7nd3AQ2ahUA

6 Steps to Select Right Mutual Fund

1. Investment Objective

Why we are investing? Define your Goal in terms of short term and Long term.

Investment objective might be long term, short term or linked to any event like kids marriage. Secondly, depending on investment objective the risk factor can be decided.

2. Ratio analysis- Risk Management

Risk and return ratios like standard deviation, Sharpe ratio etc. I have discussed in my earlier article on Measuring Mutual funds risk. Along with those ratios, one also should check out the ALPHA of the fund.  Alpha tells us what extra or less the fund manager has generated out of a given portfolio in comparison to benchmark.

In other words alpha is the performance ranking of the fund manager. You may check how often the fund manager has generated positive alpha in last few quarters and also keep a watch on its consistency going forward.

3. Consistent Performance and Ranking.

(Past Performance Is Not Indicative Of Future Results)

It is critical to check consistency in performance. For that you should also check 5 year and 10 year returns of the scheme. It will help to understand whether mutual fund scheme is fad or consistent performer. More than the recent or long term performance of any scheme its ranking among peers should be looked at. To find out the ranking you need to check out the quartile ranking which will show how the fund has performed quarter on quarter among its peer group. In quartile ranking each quartile comprises of 25 percent of peer group schemes. So one may select the scheme which has remained in top quartile most of the time.

4. Scheme asset size: Assets under management (AUM)

Less AUM in any scheme is very risky as you don’t know who the investors are and what quantum of investments they have in this particular scheme.

Too big asset size makes difficult for the fund manager to generate the Alpha.

Accordingly you can check the asset size range…

For large cap 100 to 15000 Crores.

For small cap and Mid cap 100 to 5000 Crores.

For multi cap 100 to 10000 Crores.

For Debt fund 1000 to 20000 Crores.

5. Fund manager tenure and experience

Fund manager plays a very important role in the fund’s performance. Though it is a process oriented approach but still fund manager is the ultimate decision maker and his experience and view point counts a lot. You should know who is the fund manager of the scheme and what is his past track record.

You should also look at the performance of other funds which he is managing. If the fund manager of the scheme has recently been changed, don’t panic.  Just keep a watch on his performance by looking at quarter to quarter performance.

6. Total expense ratio
Expense ratio is very important parameter to be looked at while selecting any mutual fund scheme. All fund management and distribution related expenses are borne by the scheme. This means high expense ratio will affect the fund’s returns.

Though mutual fund’s total expense ratio has been capped by SEBI, still lower the better unless we get some extraordinary return by paying higher expenses for fund management.

Normally schemes with expense ratio of upto 1.5% are considered OK as per industry experts.

Rule No 1
You should limit their investments to just one scheme from each major equity mutual fund category. For example, one largecap, one multicap, two midcap or smallcap schemes. He believes that two schemes from mid and smallcap categories would be a good idea as it help investors own all good stock in the segment. Do not choose more than two funds from one category. Owning too many schemes, even if they are great performers, from the same category would not help to diversify or maximize returns. Mostly you would be just replicating your investments as there may be overlapping of portfolios of these funds.

Rule No 2
Choose Right and Sit Tight.

Don’t panic when market is down or you may add small quantity as lumpsum in you existing SIP.

4 Golden rules to remember

Rule No 1
You should limit their investments to just one scheme from each major equity mutual fund category. For example, one largecap, one multicap, two midcap or smallcap schemes. He believes that two schemes from mid and smallcap categories would be a good idea as it help investors own all good stock in the segment. Do not choose more than two funds from one category. Owning too many schemes, even if they are great performers, from the same category would not help to diversify or maximize returns. Mostly you would be just replicating your investments as there may be overlapping of portfolios of these funds.

Rule No 2
Choose Right and Sit Tight.

Don’t panic when market is down or you may add small quantity as lumpsum in you existing SIP.

Rule No 3

You should stay away from sector funds. A retail investor should stay away from sector funds, no matter how well they are doing.

Rule No 4
Do not add funds that do not match your risk profile. Most mutual fund investors have an affinity towards top-performing schemes. Without bothering to check details, investors simply add top-performing schemes to their portfolio. This is a big mistake. A conservative investor would find the best performing mid or smallcap fund too hot to handle during a prolonged bear phase in the market. The scheme may be brilliant, but it simply doesn’t make sense to own it if it doesn’t match your profile.

Finally, always focus on your goals, investment horizon and risk profile while choosing a scheme.

Exit of any big investor out of any mutual fund may impact its overall performance very badly and the remaining investors in a scheme will have to bear the impact.  In schemes with larger AUMs this risk gets minimized.   

A good fund manager will automatically result in better performance and thus improve the quartile ranking and would also generate good alpha.

High scheme assets will help in reducing the total expense ratio of the scheme.  But, as the popular saying goes- ‘There is no scientific way to choose tomorrow’s best funds today’, so one should review the current selection every quarter or half yearly.