Publish Date: December 7, 2023
Here’s the lowdown on how to go about choosing the mutual fund option in a market experiencing positive sentiments.
It is crucial to understand investment goals, such as wealth accumulation, retirement planning, emergency funds, and education of children, among others. This will aid in determining the investment time horizon, the principal investment amount, and the risk profile.
Focussing on investment goals will aid a retail investor in creating a basic strategy to compare numerous mutual fund schemes based on their ability to address investment goals. One can compare mutual fund schemes that align with an investor’s comfort level for market fluctuations and ensure that the risk is as per the strategy.
After deciding the investment goals and zeroing in on the mutual fund schemes, an investor can analyse the funds based on their past performance.
While the past performance of a mutual fund scheme is no guarantee for its future performance, it is still an important parameter to take stock of the consistency of the fund’s performance.
For instance, in case a mutual fund scheme has consistently outperformed its benchmark indices such as Nifty 50 or Nifty Next50, it highlights that there are better chances of the scheme continuing a similar performance. An investor can suitably analyse the schemes based on historical performance and arrive at a manageable list of potential mutual fund schemes.
This measures how well a mutual fund performs concerning the level of risk it takes over a specific period. For instance, in case two mutual fund schemes have delivered the same returns over a specific period, the one with the lower risk will have a comparatively better risk-adjusted return.
While analysing and picking mutual funds, an investor can analyse them based on their risk-adjusted returns. It will also aid one in understanding the strategies employed by the fund manager to lower the overall risk in a rising market, considering there is a likelihood of such a market going down soon. Gaining insight into the Sharpe ratio, Treynor ratio, standard deviation, alpha, and beta can help better analyse the risk-adjusted returns.
Mutual fund schemes have a particular portfolio that invests the pooled money across various asset classes such as stocks, debt, and sectors. A few portfolios may invest in blue-chip stocks for lower risk, while other portfolios may invest in mid-cap or small-cap stocks for better returns and a certain level of volatility.
Analysing the portfolio holdings and ensuring they align with an investor’s investment objectives is crucial. Also, compare the portfolio quality with the risk appetite and invest afterwards.
Analysing mutual fund schemes based on qualitative measures include considering the fund manager’s experience. Moreover, the more experience you have, the better it is.
Moreover, an investor can also consider the efficiency of the Asset Management Company (AMC) or fund house and how well its mutual fund schemes have performed in the past. An ideal mutual fund house has a high Assets Under Management (AUM) and a reputation in the market. All the information can be found in the documents related to the mutual fund scheme.