One thing that bugs most people while investing in Mutual Funds is selecting the right one. And most agents don’t guide you as they push mutual funds which offer them a higher commission. If one tries oneself, she will be overwhelmed by data. So, I thought let me share my way of doing it.
Personally, I do invest in direct equity as well as mutual funds. In equity, I invest in only companies with a sound business model while in mutual funds I like to look at their historical performance.
I will use an example to zero down on the best mutual funds. Let’s assume I want to invest:
- To make high returns
- I can take losses in short-term
- Only credible mutual fund schemes
In this article
There are 20K+ mutual fund schemes. They are broadly three types
Open: You invest and redeem anytime
Closed: You invest only during the start and redeem when it’s tenure ends
Interval: You can invest or redeem only some pre-defined dates
I will only talk about open mutual funds as they provide maximum value to a retail investor.
Mutual Funds Schemes Left: ~5k
Next major classification is on the frequency of dividend.
Growth: No dividend is paid
Dividend: Dividend is paid for Daily/Weekly/Monthly/Quarterly/Annually
For our analysis, I am considering only growth option as it makes returns calculation easier.
Mutual Funds Left: 900
We reduced our universe from 20k to 800 but still we need to reach to top few.
Mutual Fund Selection
The first thing you need to classify the data into three parts. This helps to make sense of the data is better manner.
- Filters: Category, Sub-Category, AMC, AUM, Age
- Sorts: Returns, Risk
- Review: Portfolio, Exit Load, Min Investment
Filters are basically are eliminating criteria.
Category of Mutual Funds:
Equity: Invest in equity they are risky but provide high returns
Debt: Invest in bonds (give interest) issued by the government, banks, and corporates. They are safe but provide low returns
Hybrid: Invest in both equity and bonds they have moderate risk and provide moderate returns
Others: Invest in gold, real-estate, commodities, etc. They are also of moderate risk and provide moderate returns
I am fine with high risk but want high returns so I would select Equity.
Mutual Funds Schemes Left: 400
The sub-category of Equity Mutual Funds
LargeCap: invest in stocks of large companies with the market cap more than $5B. They are relatively less risky
Small/MidCap: invest in stocks of medium/ small companies with the market cap less than $5B. They are relatively riskier.
MultiCap: invests in both large, medium and small companies. They are relatively riskier.
Sector Funds: invest in a specific sector like IT, Pharma, Banking. They are considered risky as they have a sector specific risk but some sectors like pharma, IT are inherently less risky.
Others: Invest in themes like MNC, Rural etc. They are also high risk.
I can take the risk and I don’t believe in a sector that will do better than others. So I choose MidCap/ SmallCap.
Mutual Funds Schemes Left: 40
AMC, AUM, and Age
AMC: Mutual fund companies. I feel companies, which are old but still have decent traction is kind of red flag. Negative list of AMCs: Escorts, Sahara, Shriram and Quantum
AUM: for Small/Midcap <5,000 Cr and >100 Cr
Age: Atleast 5 years
Mutual Funds Schemes Left: 32
Sorts can be used to select the best funds.
Two things that are important to select the best funds are high returns and consistency of the returns. To do that, follow the steps below:
1. Sort the funds by 1 year returns and highlight top 10
2. Sort the funds by 3 year returns and from top 10 change highlight of common funds
3. Sort the funds by 5 year returns and from top 10 change highlight of common funds across all three.
Mutual Funds left: 4
The review is to do a deeper analysis of each of these funds from any constraints or risk perspective.
Minimum Investment Amount: See if falls into your affordable range
Expense Ratio: Lesser the better. Returns are uncertain whereas expenses are fixed
Exit Load: Generally its 1% within 1 year for equity and Nil for debt. If its higher be sure that you wouldn’t withdraw before exit load
Portfolio: Look for any red flags like very few stocks (less than 20), too many stocks (more than 50), Sector Concentration, High valuation (P/E or P/B), etc
Advanced Measure: Sharpe Ratio should be above 1, Std Dev to be on lower side
Some mutual funds are not accepting new investment. So need to reject them as well.
So finally for me following Small/Midcap funds are:
That’s it. Now you can invest 50% into each of them.
Hope this helps. I would write a separate blog to talk about criteria for other categories.