How To Invest In Mutual Funds-Comparison Between Funds
We all have seen the commercials where people are encouraged to invest in mutual funds. While it is the right thing to do, you need to consider some facts before investing. There are hundreds of MFs to choose from. However, not every fund is for everyone. Besides, while some funds offer better result than others.
So, when you are ready for your wealth management, it is time to compare mutual funds. While most investors focus only on the return of the MFs, there is more to it. In this article, I have discussed some of the parameters that you need to consider while comparing different mutual funds.
Yardstick:
Each of the funds has its own benchmark. It means that every company that offers MFs declare a benchmark that helps investors to analyze the performance of the related funds. So, when you are comparing the funds, you need to first check the yardstick and understand how the funds have performed.
Suppose an index of a fund has risen by 12%. However, the net asset value of the fund has risen by 14%. The fund has surely outpaced the index. On the contrary, imagine that the index has fallen by 10%. Besides, the NAV has lost by 12%. It is evident that the fund has underperformed.
Alpha and beta are financial ratios that you can use to understand the rewarding probability of the MFs. You must remember that the purpose of your investment is not to reach the yardstick but to rise above it. So, assume that there are two MFs with same beta level of 1.5. If one of the funds has alpha of 2 and the other one has alpha of 2.5, the latter is obviously better.
Allocation of assets:
Every MF scheme has its own investment objectives. Thus, every scheme uses your invested capital and allocates those in different sectors. According to the Security and Exchange Board of India or SEBI, any multi-cap equity fund can invest minimum 65% of the allocated capital to equity shares owned by different companies. Even though the allocation of assets may be risky, it depends on which sector the asset is being allocated.
While some companies invest more in financial services some schemes invest in FMCG services. In this case, even if both the MF schemes are following the guideline suggested by SEBI, the former is less risky than the latter.
When you are investing in mutual funds, you are charged a fee by the fund house as it is managing your portfolio on your behalf. This is known as expense ratio. The expense ratio depends on the percentage of asset that is under the fund management. So, if a MF scheme is charging more expense ratio than another, you should choose the one that asks for lower expense ratio.
Conclusion:
Comparing funds can be an elaborate task to perform. You not only have to compare the returns that are generated by each of the funds over a period of time but you also have to compare funds based on their caps. So, it is better if you take help of a mutual fund advisor who can help you in your mutual funds.