Mutual funds are professionally managed fund, which pools investment from several investors to invest in capital assets.
A top-performing fund typically has an excellent track record of providing higher returns over the last three and five years. The performance of these funds would have outperformed their benchmark and peer funds. You have to analyse the fund’s performance over the last few business cycles. In particular, check for the fund’s performance when the markets were down. The performance of a top-performing fund is not affected much by the market movements. However, you need to note that past performance is not indicative of future returns.
It is important to assess the financial ratios such as alpha and beta before deciding if a fund under consideration is a top-performing one in its category. Read more here to understand how to use alpha and beta to decide if a fund is top-performing one or not.
The expense ratio of a fund scheme should justify the returns provided. A frequent shuffling of the assets in the portfolio increases your cost of investment (expense ratio) as the fund manager incurs higher transaction costs. Check for the consistency in the expense ratio and ensure that you are incurring reasonable charges as the expense ratio. If you come across two funds with a similar asset allocation and past performance, then you may choose to invest in the one with the lower expense ratio.
Investments in any scheme should be made only after carefully assessing life goals. Once an assessment of the needs has been made, you need to map it with the objectives of a mutual fund scheme to find out if investing in it yields you the desired result. Like individuals, mutual funds too come with a particular objective, and it’s on the investors to gauge if their objectives are in sync with the mutual fund scheme they are going to invest.
You can base your mutual fund selection activity on the fund history. Mutual funds having a more extended history are considered good. Also, a mutual fund is judged based on how well it had performed over a good range of timeframe, especially when the markets were in a bad phase. This data will not be available for a newly launched fund. Investors should consider at least five years of a fund’s history before making any investment-related decision.
Returns and risk always go hand in hand. Returns are the rise in the overall value of the capital invested. Risk is defined as the uncertainty associated with an investment, and this concerns the possibility of not receiving any or negative returns due to numerous reasons. Hence, any investor must assess the risk-return potential, and this has made the risk-return analysis possible by financial ratios.
Sharpe and Alpha ratios provide much-needed information. Sharpe ratio is indicative of the excess return that the fund has delivered on the addition of every unit of risk being taken. Hence, funds with higher Sharpe ratio are considered better than those with a lower Sharpe ratio. Alpha shows the additional returns that the fund manager has generated as compared to the benchmark. Funds with higher Alpha are considered better.
Expense ratio is a very crucial factor that must be analysed when choosing a mutual fund plan. Expense ratio is the fee charged by the fund houses to manage your investment. It is expressed in terms of a percentage of fund’s returns. It is deducted from the returns that an investor would get. Needless to say, a higher expense ratio reduces the take-home returns of investors. The fund houses cannot charge more than the limit set by the Securities and Exchange Board of India.
The fund manager plays a significant role in the success of a fund. Fund managers handle the investors’ money; it is the fund manager’s expertise that allows them to make profits. If a fund manager is able to recognise the opportunities to make profitable investments, then the fund would see good returns. Hence, the fund manager must have a good track record.
The Mutual Fund Calculator will give you the investment value at maturity by calculating fund returns according to your investment horizon. You can adjust the variables of the calculator like SIP/lump sum, amount of investment, frequency of SIP, expected rate of return and duration of SIP.