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How To Pick a Mutual Fund
Selection Criteria
Selection Criteria
a. Performance Quartile Rating
Fund performance 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. If at all you find your scheme going below 3rd quartile in a couple of consecutive quarters it hints that time has come to exit the scheme.
b. Ratio Analysis
- Standard Deviation
Standard deviation (SD) measures the volatility the fund's returns in relation to its average. It tells you how much the fund's return can deviate from the historical mean return of the scheme. If a fund has a 12% average rate of return and a standard deviation of 4%, its return will range from 8-16%.
- Sharpe
It is the excess return over risk-free return (usually return from treasury bills or government securities) divided by the standard deviation. The higher the Sharpe Ratio, the better the fund has performed in proportion to the risk taken by it.
- ALPHA
Look for consistency
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.
c. Fund Manager Rating
Analyse and assign a rating to the fund manager based on past track record.
d. MF Rating
Mutual Fund rating of CRISIL and Value Research Online and check 2 more. Pick MF by overlap of rating across, i.e. similar rating by multiple raters.
Selection Watch (Filter)
Selection Watch (Filter)
These are good to watch however not critically fall under selection criteria
a. Total expense ratio
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.
b. Fund Manager
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 alpha and quarter to quarter performance.
If you find that due to change in the fund manager there is considerable effect on the fund’s performance which does not suit your risk appetite then you may make a decision to exit.
Check Fund Manager rating from References
Turnover Ratio
What is Turnover Ratio
c. Assets Under Management (AUM)
So how big is too big? 100$ billion
This parameter is different for debt and equity schemes. In equity the comfortable asset size in hundreds of crores, in debt it should be in thousands of crores as the investment value per investor is higher in debt funds. 90 percent of total assets under management (AUM) of the mutual fund industry are invested in debt funds, so your selected scheme assets should also have a considerable 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.
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 minimised.
d. Exit Load
It is important to check Exit Load of the mutual fund scheme as you might need money before investment horizon.
e. Consistent Performance
For mutual fund rankings or most of the analysis, one year return of any mutual fund scheme is considered. It is critical to check consistency in performance. For that you should also check 3 year and 5 year returns of the scheme. It will help to understand whether mutual fund scheme is fad or consistent performer.
f. Past Performance
Past performance relative to benchmark - this is not the same as looking at past performance. This is looking at how the fund performs under various market conditions: bullish, strongly bullish, bearish, strongly bearish. Typically, most funds will be joe-average and do well in only 2 of the 4 market conditions. Good ones will do well in 3 or 4, and (if their strategy holds up, a big assumption, but one that is necessary for fund investors to make) should outperform over time. Other factors include the fund manager's tenure, the size of the fund, and the fund's turnover ratio
g. Investment Objective
Usually, people invest with an objective. The time period to meet the aim may vary from a few months to years. For instance, saving for a downpayment for a car is a short-term goal. Working out finances for retirement and children's education and marriage is a long-term goal.
Typically, we look at equity funds for long-term objectives and money market and debt funds for short-term goals.
moneycontrol
valueresearch
- shart ratio and manager at that time
- Asset size
- fund manager
- you tube channel yadnya academy https://www.youtube.com/results?search_query=yadnya+investment+academy
https://www.youtube.com/watch?v=YA9pmkuLIfc
Large - 20%
- Long Term > 5 yeras
- Moderate Risk Profile
- Goal needs return of 12% annual [12% is realistic expectation]
Construct your Equity Mutual Fund Portfolio
Construct your Equity Mutual Fund Portfolio
1. As a young long-term MF investor, your choice of funds should always be simple and need/goal-specific, belonging to different AMCs, and preferably from the top 5 funds with 5/10-year highest returns, so that there is least scope to churn them during your investing years.
2. Select a Balanced Equity fund for your retirement corpus (aiming for 25 times your estimated annual retirement expenses), due to their inbuilt mandated auto-balancing equity-debt mechanism.
3. Select a Multicap fund for your long-term goals (of 15+ years) to weather long-term market cycles.
4. Select a Midcap fund for your medium-term goals (of 10+years) to take advantage of windfall gains in India's vibrant economy.
5. Select an ELSS fund to avail full Sec 80C tax benefits during all your earning years (after deducting EPF and term insurance contributions).
6. Maintain an Emergency fund of 6 months current expenses in a Liquid/ Ultra-short-term debt fund/ Bank flexi-deposit for contingency needs.
7. Stop any current SIPs which do not fall in the above activities, and start new SIPs in the direct plans of your new suitably selected funds.
8. Systematically redeem from all your stopped funds in the most tax-efficient manner that is possible within the new LTCG taxation rules.
9. Review and rebalance your set of funds periodically, even replace those which become really laggards during your long-term investment journey, but without increasing the type and number of funds, neither on your own nor upon any advice.
10. Halve your number of funds while retiring, retaining the Balanced and Multicap funds, by shifting others into them gradually, and aim to annually withdraw 4-5% max. of your accumulated corpus for meeting retirement expenses for your entire retired life.
References:
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