How do you compare Mutual Funds? How does one decide which one will do better and which won't? What parameters to focus on before shortlisting?

Mutual funds vary in risk and return they offer. An investor should carefully analyse that the mutual fund sits well with his portfolio and needs before investing. The following factors should be considered while analysing a mutual fund:

• Ratio Analysis- One should compare the risk and return ratio before investing in a mutual fund. One such ratio to check is the sharpe ratio.
• Total Expense Ratio- The expenses that mutual funds carry vary from one to another and all of those are borne by the scheme and hence should be taken into consideration before taking a decision to invest.
• Fund Manager Experience- The fund manager is the ultimate decision maker and all your money is at his discretion.
• Scheme Asset Size- This varies for debt and equity mutual funds. But it is necessary that there are adequate assets under management as less assets under management is very risky to invest in.
• Risk Adjusted Returns- These are the returns you get compared to the risk indicated. Funds with lower risk have high risk adjusted returns.
• Relative Performance- This tests the effectiveness of the mutual fund as compared to other mutual funds in the same category.

Before selecting a mutual fund, the investor should be clear as to the amount of risk he is willing to take. As per the risk an investor should decide on the fund that he should invest in. Moreover the duration of investment is also an important factor in selecting a fund.

Different types of funds meet different investment objectives-

·     Liquid Funds can be used as an alternative to savings account. They are low risk funds where you can save money with attractive returns and less risk

·     Sectoral funds that invest in specific sector and one can invest if he or she wants to bet on that sector.

·     Balanced fund with right proportion of debt and equity can be used for long term growth

Important criteria to be kept in mind while selecting a und are:

·     RETURNS should be significantly higher than its category benchmark

·     FUND MANAGER managing the fund should be known for his expertise of manging the funds

·     HOLDINGS of the fund should have scrips from various sectors

·     ASSET UNDER MANAGEMENT should not be too low or too high

·     AGE should have enough history to evaluate performance

·     EXPENSE RATIO should not be very high 

·     TRACK RECORD of beating the benchmark consistently in the recent past

·     SHARPE RATIO (for equity) should be significantly higher than the benchmark

·     DEBT RATING (for debt) should be atleast AA

Investment in a particular fund is primarily a function of the return and risk appetite of the investor, which in turn is governed by the investment objective of the investor. Different kind of mutual fund categories that are meant for different investment objectives and it is imperative to select the right category and kind of mutual fund.

Various types are mutual funds can be viewed : here.

Various parameters that must be evaluated while selecting a mutual fund are-

1. RETURNS should be significantly higher than its category benchmark

2. ASSET UNDER MANAGEMENT (AUM) should not be too low or too high

3. AGE should have enough history to evaluate performance

4. EXPENSE RATIO should not be very high 

5. TRACK RECORD of beating the benchmark consistently in the recent past

6. SHARPE RATIO (for equity) should be significantly higher than the benchmark

7. DEBT RATING (for debt) should be at least AA

Before selecting a mutual fund, it is very important to select the right mutual fund category. There are different kind of mutual fund categories that are meant for different investment objectives

For example: Liquid Funds can be used as an alternative to savings account. They are low risk funds where you can save money with attractive returns (compared to savings account) with less risk. 

On the other extreme are Sectoral funds that invest in specific sector and one can invest if he or she wants to bet on that sector.

Likewise there are different categories of mutual funds - you can checkout all categories here - Mutual Fund Categories

So first step is to choose the right category. After that you can find the right mutual fund in that category. Here are important things you should consider to find the best mutual fund in that category:

RETURNS should be significantly higher than its category benchmark

Fund should be TRUE TO ITS CATEGORY