Sharekhan Blog

How do you evaluate and compare Mutual Funds?

  • Jul 27, 2023

There are currently around 2000 mutual funds in India that investors can choose to invest in, even though the three basic categories of Equity, Debt, and Hybrid Funds appear to be very straightforward options. This is because each of the three categories contains several subcategories, each of which is serviced by multiple fund houses that provide comparable funds.

Having a selection of possibilities from which to pick is undoubtedly a beneficial thing; but, having an excessive number of options might make picking a fund extremely challenging. Investing requires not only a long-term commitment but also the use of money that you have worked hard to achieve; therefore, selecting the appropriate mutual fund is essential to the accomplishment of long-term goals. In this situation, evaluating the various types of mutual funds can assist you in selecting the appropriate investment strategies.

  • Returns -

When comparing different mutual fund schemes, this is by far the most prevalent criterion that investors look at. In most cases, potential investors look at the 1-year, 3 years, and 5-year returns of different schemes to compare them.

  • Returns Analyzed About the Fund's Benchmark -

The performance of the fund in comparison to its benchmark is the second criterion that is used, and it is the one that is utilized the majority of the time. Every mutual fund is measured against a certain index, and these numbers indicate the percentage of outperformance or underperformance of the fund in comparison to the benchmark.

  • Expense Ratio -

The annual percentage that you are charged by the fund house for the management of your money is referred to as the Expense Ratio. SEBI has imposed a cap on the maximum amount of money that can be charged by AMCs. AMCs are allowed to charge whatever prices they choose so long as they do not exceed the maximum amount permitted by the regulation.

  • Risk Measures -

When comparing mutual funds, investors typically focus on four to five main risk measuring ratios.

The standard deviation is a measure of the volatility of a fund's performance. The standard deviation is a measure that indicates how much the returns on a compare mutual funds have fluctuated above and below their average in the past.

The Sharpe ratio is a measure of how much additional profit a fund can create in proportion to the additional risk that it is taking on.

This ratio, also known as the Sortino Ratio, is a variation of the Sharpe Ratio that calculates its value based on the downside deviation of the mutual fund rather than the total standard deviation of the fund. The Sortino Ratio is utilized to conclude the potential downside volatility of the mutual fund.

Alpha is a measure of a mutual fund's potential to generate returns that are greater than those generated by its respective benchmark index.

The value of a mutual fund's beta reflects the additional risk that it is incurring to earn returns that are higher than its respective benchmark index.

  • Portfolio Level Information -

Both those that provide a comprehensive overview and those that provide a more detailed one

Allocation Across Market Caps - This section displays the allocation of the Equity Mutual Fund for large caps, mid caps, and small caps respectively.

According to the information that was just published in the most recent Factsheet, this is the total number of different types of investments that the mutual fund now has in its possession.

The phrase "average maturity" applies solely to debt investments and is a factor that goes into calculating how sensitive a scheme is to changes in interest rates. The term "Average Maturity" refers to the weighted average of the amount of time it will take for all of the bonds that make up a mutual fund portfolio to reach their maturity date.

The degree to which a debt mutual fund is sensitive to changes in interest rates can also be determined using the modified duration metric. It indicates the degree to which a shift in interest rates will have an impact on the price of a debt investment.

Yield to Maturity, abbreviated YTM, is data that represents the prospective returns that can be created by a debt mutual fund scheme. This data is referred to as YTM data. In addition to this, it indicates the overall quality of the bonds and money market instruments that are held by the fund.

In the section titled "Portfolio Holdings," the fund will detail the industries and firms in which it has invested.

Conclusion -

You will receive Buy, Hold, and Sell recommendations on equities and debt mutual fund schemes after they have been put through their rigorous process here. This method evaluates a variety of quantitative and qualitative characteristics to arrive at its conclusions. 

These articles have been prepared by Sharekhan and is not for any type of circulation. Any reproduction, review, retransmission, or any other use is prohibited. Sharekhan shall not be responsible for any unauthorized circulation, reproduction or distribution of this material or contents thereof to any unintended recipient. Kindly note that this page of blog articles does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The value of the investments may be affected generally by factors affecting financial markets, such as price and volume, volatility in interest rates, currency exchange rates, changes in regulatory and administrative policies of the Government or any other appropriate authority (including tax laws), or other political and economic developments. Please note that past performance of financial products and instruments does not necessarily indicate the prospects and performance thereof. The investors are not being offered any guaranteed or assured returns. The securities quoted are exemplary and are not recommendatory. While we would endeavour to update the information herein on a reasonable and timely basis, Sharekhan, its subsidiaries and associated companies, their directors and employees are under no obligation to update or keep the information current. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of use of the trading platforms mentioned herein. The trading avenues discussed, or views expressed herein may or may not be suitable for all investors. This information is only for consumption by the client, and such material should not be redistributed.

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