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Sunday, October 2, 2016

How to select the best equity mutual funds for your portfoli

10 parameters to select the best #equity #scheme.
It’s a hair tearing task to shortlist mutual funds, taking expert advice, friends’ suggestions, father’s ideology and so on to figure out the best #equity #mutual funds in India. But, the more you discuss, the more complicated it gets. I have found my way of selecting the mutual funds with a little bit of help from the mutual funds fact sheets and the publicly available information.
I have divided the topic in simple 10 segments, once we put our shortlisted equity mutual funds of
our choice, we just simply need to check if its matching the parameters checklist and we are done.  While investing in equity funds, we must remember that the investment horizon should be long enough realise the benefit of equity investment, ideally above seven years. The ideal way of investing is through Systematic investment plan (SIP) to get cost average and benefit of compounding.

Before I begin with the headings, I must explain what a good equity mutual Fund is. It is the fund which consistently beat the index and stays ahead of the curve. Equity mutual funds should be considered for long term (minimum 5 years), within equity mutual fund there are several categories as below, based on the core objective of the fund. According to Indian system any mutual fund maintains equity holding above 60% is treated as equity mutual Funds. Every class and subcategory of mutual funds has a defined objective, hence the returns.

In this article we intend to only concentrate on the parameters for selecting a right equity fund.

1. The Fund house and the AUM– I personally prefer funds from top 5-7 Asset Management Company. So, once I am sure of the category, I would choose a good pedigree. The volume and pedigree cannot predict a fund’s performance, but it definitely shows the investors trust and an established history and record of fund management.

Asset under management is not true indication of future performance, largest AUM doesn’t ensure maximum return. However, a good equity mutual fund will have assets over multi hundred crore. Funds with lower assets may feel stress of volatile market movements or high redemption pressure. Also, bigger funds will likely have lesser expense burden.   

2. Fund manager – A fund manager is the person responsible for complete management of the mutual fund. With his team of analysts and trading desk he ensures smooth functioning, investments, churning of portfolio based on opportunities and threats in the stock markets keeping up with the investment objective of the fund. His experience gives an indication of his working style, and a seasoned manager is assumed to see few stock market cycles.

3. Standard deviation ratio – A mutual fund scheme is expected to give returned aligned to its bench mark index and its investment philosophy. The standard deviation ratio indicates the possible deviation between the historical mean return of the scheme. If a fund has historical mean return of 10% and standard deviation of 2%, it indicates the fund’s future return could be 10±2%

4. Sharpe Ratio –Sharpe ratio is an indicator of fund’s performance compared to the risk taken by it. It captures the excess return the fund has earned. Higher sharpe ratio indicates better fund performance.

5. Expense ratio – This particular ratio gives you an idea how much money is getting into the operational expense for managing the fund. This is indicated in percentage term in any fund fact sheet. Though #regulators have capped the ratio, a lower ratio indicates it is not eating much into the return on your investment. A average expense ratio could be at 1.5%

6. Alpha: The simplest definition of an alpha would be the excess return of a fund compared to its benchmark index. If a fund has an alpha of 10%, it means it has outperformed its benchmark by 10% during a specified period.

7. Beta: Quite like equity stock the Beta refers to fund's volatility compared to that of a benchmark. For example if beta of a fund is 2, for every 10% upside or downside, the fund's NAV would be 20% in the respective direction.

8. Portfolio turnover ratio – This particular ratio specifically highlights the churning in the portfolio. Higher churning indicates higher cost. Until and unless the fund is giving exorbitant returns compared to its peers and benchmark, it could become a point of contention.   

9. Fund rating – No harm in looking at it once, but it may or may not help with a true reflection and you can skip this parameter if your fund analysis doesn’t match with their rating. Ratings are assigned annually and every year the 5star rating changes and their criteria of analysing could differ from your long term objective.  

10. Read the SID
Go to the mutual fund website and check for fund fact sheet (For example, find Franklin India Blue Chip Scheme Information document)
2. Check for analysis by few independent websites like – valueresearchonline, mutualfundsinddia etc.

Do your own homework with the 10 points mentioned above or any other reference points. 

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