Criterion to Compare Mutual Funds

Every investor would be interested in knowing which is the best performing mutual fund as of now. The reason behind this is they would like to assess whether the scheme they are choosing or continuing with are already the best performing mutual fund schemes or not. If it is not worth the performance, they would like to switch their investments from the existing scheme to the currently best performing mutual funds.

You should take a note that best mutual funds do not mean the best in returns, but the one which suits your risk profile and goals and the one that fits in your peer group. The biggest mistake which many mutual fund investors make is selecting the mutual funds on the basis of recent performance and also depend on the star ratings, no doubt  can be one of the factors to consider. However, there are many criteria which needs to be looked at before finalizing your mutual fund portfolio.


Know the Performance Ranking

The performance ranking among the schemes need to look at is the first thing to do. More than the recent or long-term performance, it is necessary to check the quartile ranking for the scheme. The quartile ranking shows how the fund has performed during the quarter to quarter basis amongst its competitors. In quartile ranking, the quartile is composed of 25 percent of peer group schemes. So one may pick the scheme which has remained in top quartile maximum times. If you observe the investment schemes ranking going below 3rd quartile in a series of consecutive quarters it indicates you to exit from the scheme. You can check these rankings from the factsheets of several mutual fund companies and also check their research websites.

Assess the Ratio Analysis

Mutual funds risk can be measured with the risk-return ratios and standard deviation, Sharpe ratio, alpha ratio are such ratios to name a few. When you check the Alpha ratio which is the performance ranking of the fund manager, clearly describes what surplus or deficit the fund manager has generated from a specified portfolio as compared to the benchmark. The positive alpha generated by the fund manager in last few quarters you should assess in order to know whether the fund is maintaining its consistency or not.

Total Expense Ratio

The expense ratio is a critical factor to be assessed at while choosing your mutual fund scheme. All fund management and distribution expenses are rendered by the scheme. It means higher expense ratio will impact the fund’s returns. Although the total expense ratio comes under the regulations of SEBI, still the lower expense ratios are preferred until some exceptional returns are generated by paying higher expenses for managing the fund.

The tenure of Fund Manager and Experience

Fund manager plays an active role in the mutual funds’ performance. Since, managing a scheme is a full-time job so it comes under the discretion of the fund manager and his experience and wisdom in picking up the best performer. It is advisable to you that you should know who is the fund manager of the scheme and about his past record. You should also consider the past performance of other funds which is managed by him. If there is a change in the fund manager of any scheme, don’t lose hope. Just keep a track on his performance by checking at alpha and quarter-to-quarter basis performance. If you see that with respect to a change in the fund manager there has been a noticeable effect on the fund’s performance which does not accommodate your risk appetite then you can decide to quit from the scheme.

Asset Size of the Scheme

This criterion is different for equity and debt schemes. In equity, the stipulated asset size is hundreds of crores whereas in debt, it should be thousands of crores as the worth of investment per investor is higher in debt funds. Since, 90% of total assets under management(AUM) of the mutual fund industry are invested in debt funds, subsequently, constitutes a considerable asset size in AUM.

Lesser AUM in any scheme proves to be risky as you are not aware of who the investors are and what quantum of investments are made by them in this particular scheme. If a big investor makes an exit from the scheme, it makes a heavy impact on the overall performance of the scheme which ultimately falls on the remaining investors of the scheme. Those schemes with larger AUMs tend to minimize their risk.

After going through the above parameters, it becomes the duty of a good fund manager to automatically  deliver the better performance of its scheme which in turn demands to focus towards improving the quartile ranking and generating a good alpha. Also, the higher scheme assets will tend to reduce the total expense ratio of the scheme. Hence, the selection of current funds should be based out on their every quarter or half yearly performance.

Article Source:

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s