For ages, mutual funds have been one of the most balanced investments as it offers a good return on the money invested provided one plays their cards right. This blog will discuss ten critical factors an investor should consider when picking mutual funds. The ten essential things to consider are:
- Standard deviation (SD):
The standard deviation measures the volatility of a mutual fund scheme’s returns over a specific period. It indicates how far the fund’s return can deviate from the scheme’s historical mean return. If a fund has a 12 percent average rate of return and a 4 percent standard deviation, its recovery will range from 8 to 16 percent.
- Sharpe Ratio:
This metric measures how well the fund has performed concerning the risk it has taken. It is calculated by dividing the excess return over the risk-free return (typically the return on treasury bills or government securities) by the standard deviation. The Sharpe Ratio indicates how well a fund has performed in relation to the risk it has taken.
The excess return of a fund over its benchmark index is referred to as alpha. If a fund has an alpha of 10%, it means it outperformed its benchmark by 10% over a given period.
Beta is a measure of a fund’s volatility in comparison to a benchmark. It indicates how much a fund’s performance would vary in contrast to a standard. A fund with a beta of one moves as much as the benchmark. If a fund has a beta of 1.5, it means that for every 10% increase or decrease in the fund’s NAV, the fund’s NAV will increase by 15% in that direction.
- Choose Consistently performing Mutual Funds:
A good mutual fund scheme is one that consistently outperforms its benchmark over three to five years. Look for consistency in performance over more extended periods, such as three, five, and ten years, rather than short-term returns. Choose schemes that have consistently outperformed their benchmark indices (the indexes against which a fund’s returns are compared) and compare favorably to their peers. Choose schemes that have consistently outperformed their benchmark indices (the indexes against which a fund’s returns are compared) and compare favorably to their peer group over the periods specified above.
- Expense Ratio:
This ratio represents the funds’ annual expenses expressed as a percentage of their average net asset. When deciding between two similar funds, you should consider the fees they charge. Lowering your costs will benefit you in the long run. Typically, schemes with more assets have a lower expense ratio than a small-cap fund. The fixed expenses associated with the fund are spread out over more investors as the funds grow in size, reducing costs and leaving more funds for investment.
- Diversification of Portfolio:
A diversified portfolio is less risky than concentrated in a single stock, asset class, or industry. You can look at a scheme’s portfolio history to see if the fund has historically maintained a well-diversified portfolio. Examine the monthly portfolio of a specific plan on a fund house’s website.
- The risk-reward:
Most investments involve some level of risk, and if the returns are not proportional to the risks taken, such investments are not worthwhile. A good mutual fund outperforms others in terms of returns for the same level of risk. Returns on risk-adjusted investments are compared to returns on risk-free assets such as government bonds or bank term deposits.
- The asset size of the fund:
Asset size is the market value of the mutual fund. When it comes to the size of a mutual fund for investment purposes, bigger isn’t always better. The fund’s investment style and ability to meet or exceed market benchmark returns through its investment allocations are typically key aspects for investment fund quality and investment consideration.
- Pick the right fund manager:
When you choose to invest in a mutual fund as an investor, you are constructing a portfolio of securities. The fund managers make the buying and selling decisions based on research and analysis. You can manage your portfolio either actively or passively. If you have a passively managed portfolio, it is based on an established index, and the components are chosen with the underlying index in mind. In the case of an actively managed portfolio, the fund manager selects the portfolio’s components. These fund managers have a significant impact on the performance of active mutual funds.
Another important factor apart from the ten things mentioned above that one must consider is the Brokerage firm. For regular mutual funds, the broker plays a considerable role, and so does the Brokerage fee. Tradeplus offers a minimal brokerage fee of Rs 9 or 0.01% of the traded value, whichever is lower than the brokerage. Further, you can also opt for a flat brokerage fee plan that lets you do unlimited transactions per month; these plans are priced at Rs 99 and 499.
We also provide a pocket-packed mutual fund trading platform in the form of Infini MF. The trading application is available on both Android and iOS platforms. It also comes stacked with some of the best analytical tools and a dedicated portfolio tracker to provide a seamless investment experience.