When we think about investments in Mutual funds, then the first question always comes in mind is which fund to invest in. There are lots of choices available for investor but not all the options can be considered. There are more than 40 Asset Management Companies (AMCs) currently in Indian Mutual Fund Industry at present and several schemes are offered by these companies. It will be challenge for investors, when it comes to identify a mutual fund scheme which best suits to their portfolio out of large universe of schemes. Good news for the investor is that most of the scheme doesn’t make to good rating but still the main challenge lies in identifying from those few schemes which make to good rating.
Investment in mutual funds always comes with evaluating your own investment objective with good investment decisions, in which investor always get confused. Their confusion always get enhanced by misrepresentation of mutual fund agent as they are hungry for their own commission. Because of all these unfavourable things, it’s necessary for an investor to have a set of objective parameters because these parameters always serve as a benchmark for investor for selecting mutual fund for their portfolio or for evaluating respective mutual funds. Here, I am providing you four steps for selecting a right diversify fund:-
1. Compare the fund against its own performance.
First and foremost it’s important to compare fund with its own historical performance. All funds don’t show stability in retaining their performance every year on. By evaluating funds against its own historical performance investor is just ensuring that he/she is choosing the fund with most consistent performance record for their portfolio. This is important because all mutual funds are not able to sustain their good decisions year after year going from one market cycle to another and then slip up. So, it’s necessary for investor to filter effectively, the inconsistent performers and keep them away from their portfolio as they can affect their future objectives.
2. Comparison of return across funds within same category.
Benchmarking involves comparing funds within a same category. For example, you are evaluation DSPBR Top 100 equity which comes under large cap diversified equity fund for investment. So, you need to compare this fund returns with other large cap diversified equity funds. Comparing it with multi cap HDFC equity fund for example will deliver wrong results because their risk-return relationships between these two funds are not comparable.
As we all know that equity deliver best returns over a time period of 3 to 5 years, so investor should mind this that they need to make investment in diversified equity funds with long term perspective. Hence, the investor should consider longer time period while comparing returns before taking a decision about investing in a fund. Comparing a fund for such a long period will give investor a good idea about how fund have performed in a stock market cycle.
3. Comparison of returns against their benchmark index.
AMFI regulations demand that every fund should mention its benchmark index in their offer documents. It serves double purpose as being a guiding post for fund manager and investor both. Every investor must keep an eye on a benchmark index and how that fund has performed against it. Again the investor should consider the performance of the equity fund over a longer term, while comparing it. However most of the equity funds have outperformed their benchmark indices for a long time period say 3 to 5 years. However during bad market condition like the one in oct-nov 2008, investor will see that most equity funds was struggling for returns equal to their benchmark indices. The funds that can outperform their benchmark indices during bad market or volatile market conditions should be marked.
4. Risk-related parameters.
NAV returns are important for investor but investor should not ignore the risk taken by the fund for achieving those returns. All mutual funds are market linked so they are associated directly with stock market related risk. There are 2 things which investor should take into account i.e volatility of the fund which is indicated with the help of Standard Deviation and risk adjusted returns which are calculated with Sharpe Ratio.
Standard deviation shows the degree of risk fund has taken and Sharpe Ratio indicated the return generated by the fund per unit of risk taken. Standard deviation of the fund should always be lower than the other funds in the same category, whereas Sharpe Ratio of the fund should be higher than other funds. Best funds are those funds which have lowest Standard Deviation and highest Sharpe Ratio within same category of funds. Here also, Investor should evaluate the Standard Deviation and Sharpe Ratio of the fund on a historical basis for identifying the most consistent fund in that category.
Investment in mutual funds always comes with evaluating your own investment objective with good investment decisions, in which investor always get confused. Their confusion always get enhanced by misrepresentation of mutual fund agent as they are hungry for their own commission. Because of all these unfavourable things, it’s necessary for an investor to have a set of objective parameters because these parameters always serve as a benchmark for investor for selecting mutual fund for their portfolio or for evaluating respective mutual funds. Here, I am providing you four steps for selecting a right diversify fund:-
1. Compare the fund against its own performance.
First and foremost it’s important to compare fund with its own historical performance. All funds don’t show stability in retaining their performance every year on. By evaluating funds against its own historical performance investor is just ensuring that he/she is choosing the fund with most consistent performance record for their portfolio. This is important because all mutual funds are not able to sustain their good decisions year after year going from one market cycle to another and then slip up. So, it’s necessary for investor to filter effectively, the inconsistent performers and keep them away from their portfolio as they can affect their future objectives.
2. Comparison of return across funds within same category.
Benchmarking involves comparing funds within a same category. For example, you are evaluation DSPBR Top 100 equity which comes under large cap diversified equity fund for investment. So, you need to compare this fund returns with other large cap diversified equity funds. Comparing it with multi cap HDFC equity fund for example will deliver wrong results because their risk-return relationships between these two funds are not comparable.
As we all know that equity deliver best returns over a time period of 3 to 5 years, so investor should mind this that they need to make investment in diversified equity funds with long term perspective. Hence, the investor should consider longer time period while comparing returns before taking a decision about investing in a fund. Comparing a fund for such a long period will give investor a good idea about how fund have performed in a stock market cycle.
3. Comparison of returns against their benchmark index.
AMFI regulations demand that every fund should mention its benchmark index in their offer documents. It serves double purpose as being a guiding post for fund manager and investor both. Every investor must keep an eye on a benchmark index and how that fund has performed against it. Again the investor should consider the performance of the equity fund over a longer term, while comparing it. However most of the equity funds have outperformed their benchmark indices for a long time period say 3 to 5 years. However during bad market condition like the one in oct-nov 2008, investor will see that most equity funds was struggling for returns equal to their benchmark indices. The funds that can outperform their benchmark indices during bad market or volatile market conditions should be marked.
4. Risk-related parameters.
NAV returns are important for investor but investor should not ignore the risk taken by the fund for achieving those returns. All mutual funds are market linked so they are associated directly with stock market related risk. There are 2 things which investor should take into account i.e volatility of the fund which is indicated with the help of Standard Deviation and risk adjusted returns which are calculated with Sharpe Ratio.
Standard deviation shows the degree of risk fund has taken and Sharpe Ratio indicated the return generated by the fund per unit of risk taken. Standard deviation of the fund should always be lower than the other funds in the same category, whereas Sharpe Ratio of the fund should be higher than other funds. Best funds are those funds which have lowest Standard Deviation and highest Sharpe Ratio within same category of funds. Here also, Investor should evaluate the Standard Deviation and Sharpe Ratio of the fund on a historical basis for identifying the most consistent fund in that category.
No comments:
Post a Comment