Easy Steps for Analysing a Mutual Fund

How many of you have been completely mind-boggled when faced with mutual funds? All the terminology associated with mutual funds – NAV, returns, yield, CRISIl rating, absolute returns, peer comparison, portfolio – do they confuse you? Have you wondered the easiest way to evaluate a mutual fund? If your answer to all the above questions is yes, then this article is for you. We shall discuss the steps you can take as an investor to understand a mutual fund before you decide to choose it.

Investment Objective

The performance of a mutual fund is not always the criteria for you to buy one. It should match your investment objective. Investment objective means the reason why you wish to invest in mutual funds. There are many kinds of mutual funds, and each of them suits a different kind of investor. If your investment objective is high-risk, accelerated growth, then you could go for pure equity high-growth funds. If you wish to invest for the sake of stable income, you may consider debt funds or value funds. If you are a moderate risk taker, hybrid funds or equity income funds may be the thing for you. So at the outset, you need to be clear of what you need from a mutual fund investment.

Benchmark Comparison

Each fund is aligned with a benchmark that serves as a point of reference. The benchmark it uses –whether it is Sensex or Nifty 100 or S&P 500 – depends on the kind of mutual fund you have chosen. Each type of fund uses a different benchmark. This allows you to compare the performance of the mutual fund with its peers and form a realistic understanding of its growth and returns. You need to understand which benchmark the funds you have shortlisted subscribes to, and compare the performance of your chosen funds with both the benchmark and other similar funds. For example, Franklin Build India Fund uses S&P BSE 200 as benchmark, while UTI Bond Fund goes with CRISIL Composite Bond Fund.

Fund Performance

The main numbers you need to look at to understand fund performance are the periodic returns or profits. Most funds give details of 1-month, 3-month, 6-month, 1-year, 3-year and 5-year returns. These numbers will give you an idea of how much profit the mutual fund is making in the given time frame. With this, you can also find out if the fund you like gives you better returns in the short term or long term. If you are able to gather data of all the funds that you are interested in, you can do a comparative analysis and decide which of the funds is best for your investment pattern.

Portfolio Concentration Ratio

Many of the funds available in the market today are hybrid funds investing in more than one kind of stocks. Running an eye through the portfolio will give you an idea of what kind of stocks the fund is investing in. It will help you decide if you want mutual funds with a higher equity ratio, a higher debt ratio, a value fund, a thematic fund, or any other kind. This will also help you decide how much diversification you need to do in your overall mutual fund portfolio.

Charges Applicable

The key charges applicable in a mutual fund are: fund management fees, exit load, entry load, transaction charges, demat account charges, etc. However, every mutual fund does not charge all of these from a customer. You can shop around to find the kind of fund you want from Asset Management Companies with the least charges.

Apart from this, there are indicators such as CRISIL ratings (especially for debt schemes) that tell you the credit score of the given fund, and standard deviation which signifies the total risk associated with the fund that can be taken into account. But as a new investor, the above 5 points should give you a good start towards choosing a profitable and useful mutual fund for yourself. 

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