Mutual Funds murmur is all over the town today, we can see Ads virtually all across, i.e. TV, Cinema halls, Bill boards, Print-media, and all this promoted thru various stake holders.
But the big question, like the most common Ad by AMFI, “Mutual Funds Sahi Hai”, is how to select funds?
There are more than 2000 primary mutual fund schemes in India, offered thru 43 Mutual Fund companies. Primary schemes will further have many variants, known as plans (for e.g. Dividend, Growth etc.). If all of them are taken into account, there would be more than 11k+ schemes. Data from Wikipedia.
Below are some of the tools, an advisor uses to shortlist funds:
Alpha: Alpha is the most sought-after parameter, which speaks on the fund’s performance over the benchmark. A positive alpha means the fund has outperformed its benchmark index. Whereas, a negative alpha indicates an under performance of the fund. The more positive an alpha the healthier for investors.
Beta: Beta is a measure of the volatility of a particular fund, in comparison to the market as a whole, i.e. the extent to which the fund’s return is impacted by market factors. Conservative investors should focus on mutual funds schemes with low beta. Aggressive investors can opt to invest in mutual fund schemes which have higher beta value for higher returns taking more risk.
R-squared: R-squared is another statistic concept, to measure the correlation between beta and its benchmark index. R-squared values range between 0 and 1, where 0 represents no correlation and 1 represents full correlation. If a fund’s beta has an R-squared value that is between 0.75 and 1, the beta of that fund should be trusted.
Standard Deviation: Standard deviation tells us, how much the return on a fund is deviating from the expected returns, based on its historical performance. In other words, it evaluates the volatility of the fund. The total risk of a mutual fund is measured by Standard Deviation.
Sharpe Ratio: Sharpe ratio is another important measure that evaluates the return that a fund has generated relative to the risk taken. Risk here is measured by Standard Deviation. It is used for funds that have low correlation with benchmark index. This ratio helps an investor to know whether it is a safe bet to invest in this fund by taking the quantum of risk.
Conclusion: Mutual Funds without any doubt is one of the best investment avenue in the market. But to shortlist funds, one needs a qualified advisor, who understands above parameters & ratios, and can offer detailed explanations.
At Moneyfrog.in, we offer a hybrid model, of online & offline advisory, to build your mutual fund portfolio, aligned with your future goals.
Happy Investing!!!
Disclaimer: Investment in mutual funds, is subject to market risks, including the potential loss of principle and fluctuation in value. Past performance does not guarantee future results. You should consider the Investment objectives, risks, charges and expenses of investment securities carefully before investing. Read the prospectus carefully before investing.