The total asset base for mutual funds in India grew by 9.3% in January 2023, breaching ₹23 lakhs and increasing the share of retail investors to 57.3%. The efforts of the Association of Mutual Funds in India (AMFI) seem to have paid off, creating awareness about mutual fund investments in the country. If you too are drawn to this investment instrument but don’t know which funds to invest in, this is the right place to learn how to invest in mutual funds.
Start by defining your financial goals and identify the types of mutual funds you would like to invest in. Once you’ve listed the various options, here’s how to evaluate them in the spirit of #YMYL.
Mutual Fund Comparison Parameters
|Quantitative Parameters||Qualitative Parameters|
|Benchmark Returns||Portfolio Distribution|
|Past Performance||Fund Management Team|
|Peer-to-Peer Comparison||Credibility of the Mutual Fund House|
|Tax Implications||Schemes-to-Fund-Manager Ratio|
|Cost of Investment|
|Risk Measure Statistics|
|Assets Under Management|
Each mutual fund scheme has a benchmark index. While comparing your options, choose a fund that has consistently performed in sync with or better than the benchmark. However, it is critical to pick the appropriate benchmark. Similarly, compare the performance of the fund to that of its peers. For instance, compare a large-cap fund to another large-cap fund. Avoid comparing apples to oranges.
Before committing to a fund, check how long it has been operating and its return history. Gauging the short- and long-term resilience of the fund gives you a better understanding of its alignment with your financial goals. Learning about the fund managers and their areas of expertise also provides insights into their trading styles in terms of risk-taking. This can help you align your investment to your risk appetite.
Some funds are heavily skewed toward high-risk/high-return sectors, while others play it safe with a balance of assets. Ensuring that the fund manager is following the SEBI mandate for the category the fund falls in is an essential parameter to help you match your risk appetite to the risk profile of the fund.
Evaluate the Expense Ratio
SEBI restricts a mutual fund from charging more than 2.25% of the fund’s AUM (assets under management). These expenses include maintenance, security, distribution, transactions and other fees charged by the fund manager. The fees may vary for a regular and lumpsum plan and across different types of funds. It is critical to take these fees into account while comparing mutual funds to ensure that you do not lose a substantial part of the returns to fees.
Portfolio Turnover Ratio
Portfolio turnover directly impacts expenses. A high turnover means that the portfolio manager frequently shuffles the assets in the fund, which may mean increased transaction and brokerage fees. Therefore, comparing the turnover ratio and considering it against returns is critical when choosing an investment fund.
Maintaining low risks often means low returns, which is not always preferred by all investors. So, evaluating certain values to gauge the risk-adjusted returns can helps investors make an informed decision. If you are interested in high returns, despite high risks, some numbers to consider are:
Risk Standard Deviation
This is a measure of the risk associated with volatility. Evaluating how risk varies in times of high volatility can help you understand how a scheme may perform during such periods.
This is a measure of additional returns for each unit risk taken. This can help you identify how risk and return are correlated, and whether a scheme can offer higher average performance for every unit risk taken.
It is advisable to learn all you can about how to invest in mutual funds before investing your hard-earned money. After all, as they say – #YMYL.