The trick to compare mutual fund schemes!

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Today, Mutual Funds in India have currently about 7.64 crore SIP accounts. With an SIP, you can spend a set amount of money every month in a planned and consistent way.

Most people choose to invest in equity schemes through SIPs. Even if you only spend a small amount of money like Rs 100 every month, it can grow significantly over time.

That said, if one goes by a number that indicates the booming growth, the assets under management or AUM stood at Rs 50.78 lakh crore  as of December 31, 2023.

With over 1,300 schemes under open-ended mutual funds, comparing two schemes of a particular mutual fund category can be a daunting task. Open ended scheme means investors can buy and sell units at any desired time.

Today, many investors, like Geeta, desire to invest in mutual funds through SIPs or lumpsum. but don’t know how to compare or properly examine them before buying them.

So Let’s see how investors can compare mutual fund schemes:

As per the Association of Mutual Funds on India or AMFI, there are 11 different types of equity  mutual funds. Under debt mutual funds, there are 16 different types of debt mutual funds. Similarly, under hybrid mutual funds, there are 6 different types of hybrid funds.

The point is that an investor cannot compare one equity fund with a different hybrid fund. Financial advisors always emphasise comparing an apple with an apple, meaning the same mutual fund scheme with another mutual fund scheme but within the same category. For example investors must compare large cap funds with other funds of same market cap.

Today, various fintech companies, wealth management services, and mutual fund research-specific companies help investors by providing tools on their websites.

Companies such as Value Research, Scripbox, Bajaj Finserv, and Morningstar, and many others provide tools such as Fund comparison, SIP Calculator, list of best mutual funds, information regarding the latest NFOs and latest news on AMCs.

You can use many robo advisory platforms like 5 Paisa, Groww, AngelOne etc. You can also use these platforms to compare categories of different fund categories and returns generated.

The general economic circumstances might cause market swings. It can lower the margin of safety in the market. It can raise the scheme’s risk profile over your tolerance for risk.

Therefore, it is essential to regularly assess the mutual fund scheme’s performance. So that you are able to take prompt action to stop making further losses.

Most investors compare the performance of different funds using only historical data. however, the disclaimer stating a fund’s past performance does not guarantee future results should be kept in mind.

There are some important factors to consider when you analyse a mutual funds:

First is Benchmark: To assess the performance of mutual fund, investors must compare its performance to a suitable benchmark. It is an index. If the benchmark has given higher return than the fund has underperformed. If its vice versa then fund is a outperformer.

Second is Expense ratio: As a mutual fund investor, you should check the Total expense ratio or (TER) of any fund. You must ensure that it does not impact your earnings. Expense ratio is that proportion of your earning which goes to your manager.

If a mutual fund has a TER of 2% and you make a profit of 17%, your total returns will be only 15%. A lower TER may imply a higher profit margin.

No let’s see what is Asset allocation? It’s also crucial to assess the fund’s sector and industry exposure. This ensures a balanced allocation across sectors to mitigate the concentration risk of one particular sector. To align with investment objectives and views on different industries, it is important to have balanced asset allocation.

You must also assess the risk factor of your mutual fund investment.

Risk-adjusted return: There are three types of risks. First is Market risk. It is due to market volatility. Second is credit risk. That is there should be no risk of default by the companies in which you have invested. and check whether financial conditions of those companies are okay or not?

The third type of risk is interest risk. This arises out of interest rate volatility.

When fund manager strategise  their fund so that they make more returns compared to the anticipated risks, that is known as risk-adjusted returns. Investors should consider risk-adjusted returns before investing in any mutual fund. It gives an idea how much risk is involved in any scheme, and how much return you can anticipate.

Remember, the scheme with the lowest risk will have a high risk-adjusted return.

Investors should consider fund managers track track record apart from scheme’s historical performance and asset allocation . Similarly, the success of a fund and its returns are directly correlated with the quality of the stocks held in scheme’s portfolio.

According to Deepak Gagrani, Founder, of Madhuban Finvest, investors should consider some factors before investing in mutual funds. They should consider financial goal, risk appetite and time horizon before they select the funds to invest in. You should also enquire about fund management team’s track record, risk ratios and expense ratios. Don’t solely chase past performance

When it comes to investing in mutual funds, don’t take decisions in a haphazard manner.  You should also enquire how should you analyse different schemes. Mutual funds target must align with your financial goals. You must consider your risk appetite and time horizon as well before you decide on which fund to invest.

Typically, it’s recommended that investors own a maximum of 5-8 mutual fund schemes from different categories. Do your own research before investing.

Always take the help of a financial advisor if you are not able to decide yourself. But never invest blindly. Otherwise your hard earned money would go down the drain.