In India, many investors are moving their investments from traditional investments classes like Fixed deposits, gold, post office savings scheme to mutual funds. Why such a transition? A mutual fund has the ability to generate higher returns over a period of time.
But how to find good mutual funds?
Its a hell of task. This is article, we are covering points which you need to be consider as an investor before selecting the right mutual funds schemes for you.
All right! Let us invest in mutual funds. Hold on. There is over 44 assets management company are there in India. Eg: Axis AMC, SBI AMC, HDFC AMC, Nippon India etc. This AMC offers mutual fund schemes which are collectively more than 2500 schemes. So choosing a good mutual fund can be a daunting task for beginners.
Few points to choose mutual funds:
- Consistent return: You want returns higher than gold, FD’s, etc. So you opt to invest in the mutual fund. Check the returns generated by the fund. Don’t check for a 3years return! Check how the fund performed for 5 years, 8 years, 10 years, etc. By looking at this perspective, you can get an idea of how well the fund performed in the long haul.
2. Assets allocation: To generated higher returns Fund manager can concentrate his bet on banking or technology and allocate more capital on the sector that he thinks would perform well. So he allocates more than 25 percent of fund capital to the banking sector or Technology sector. If his bet turns into a win, it will generate more returns.
The fund manager will be Hero. etc. what if his bet “lost”. The investors will lose their money, sit on negative returns. As an investor, You need to do your due diligence where the fund allocated its capital. is it highly concentrated in a particular sector or its a well diversified fund?
At the end of the day, it’s your hard-earned money So choose well !
3. Turnover Ratio: This metric would tell us how actively the fund is buying and selling its shares. The low turnover ratio is good because the manager has convictions on his investment, in there for a long term game rather than focusing on yearly returns or quarterly performance of a fund which is not investor friendly.
Must read: How to find good mutual funds for beginners? (Part 2)
- Alpha: You need to check this ratio called ” Alpha”. This ratio tells us how the fund performed and generated a return by beating the Index. More alpha equates to better return generated by the fund over the Index return.
- Beta: This ratio tells us how volatile the fund is compared to its benchmark. Less beta equals less volatility. If fund A has 1.2 Beta, and the category benchmark is 1. If fund B has 0.77 beta and the category benchmark is 1. It is better to go with Fund B. Because Fund B has downside protection to risk compared to Fund A. In category A, if the benchmark falls 1 percent, the fund falls 1.2 percent. It is 20 % more volatile relative to its index benchmark.