12:33 pm - Monday November 19, 2018

7 parameters of selecting the best mutual fund for 2018

1096 Viewed Jacob Martin

Mutual funds are highly popular among investors as one of the great instruments for wealth creation. If you still haven’t invested in one, the year 2018 can be your best time to invest in the right scheme. However, selecting the right fund can be a challenge as mutual funds come with a lot of riddled myths, perceptions, and opinions.

In addition, different kinds of mutual funds can confuse an investor to find the right scheme to meet his financial goals. To make the process simpler for you, here are seven parameters of selecting the best mutual funds for 2018:

1) Risk Metrics

The mutual fund needs to be measured for suitability and position correction. This means that two similar funds may be taking the different level of risk to generate required performances. So, the high-performance fund may lull the investors into believing that such a fund is a good investment idea compared to the other one.

However, the comparison of the fund’s risk ratio with the peers should provide a clearer picture. There are many statistical risk measures to know the same. For instance, the high standard deviation for a particular fund denotes higher volatility in return and thus higher uncertainty of performance. Whereas another parameter like the Beta ratio can be used to find the correlation of the fund with the market benchmark. A Sharpe ratio measures risk-adjusted return of your fund.

Pro Tip: The risk-adjusted return is better when the Sharpe ratio is higher

2) Portfolio Metrics

Investors can gauge the quality of the portfolio and the risk with the following measures:

  • Portfolio turnover ratio- It denotes how frequently assets within a fund are bought and sold by the fund manager
  • Portfolio liquidity risk- It compares the amount of cash relative to total assets held by a mutual fund
  • Portfolio concentration risk- Denotes the risk due to large concentration of the portfolio in handful of sectors

The above ratios will help investors to know how well the portfolio is structured for long-term growth and to mitigate various market situations.

3) Exit Load

An investor pays the exit load of a mutual fund when he redeems the investment before a specified period. So basically, exit loads are imposed to discourage premature withdrawals, and different funds have different exit loads.

So, investors need to check exit load of the mutual fund as you might need money before investment horizon.

Pro Tip: Invest in schemes with minimal exit load requirement

4) Asset Under Management

Net assets under management (AUM) can give a fair idea of the mutual fund scheme. For instance, less Asset Under Management in any scheme can be risky as the exit of any prominent investor may impact the overall performance the fund.

Pro Tip: Investors should choose mutual fund schemes that have higher AUM as it would minimise risks of any significant unfavourable market condition.

5) Expense Ratio

The expense ratio for any mutual fund scheme is the annual expense incurred by the scheme and is expressed in percentage of the average net asset. As the funds grow in size, its expense ratio reduces as the fixed costs associated with the fund get distributed amongst the investors. High expense ratio affects the fund’s returns, so lower the ratio better it is.

Pro Tip: To choose between the two best mutual funds for 2018, check their expense ratio. Schemes with higher assets will have lower expense ratio than a small-sized fund.

6) Fund House and Fund Manager

To go with the best mutual funds for 2018, gauge the quality and reputation of the fund house. Remember that a well-managed fund house will dedicate its time for:

  • Knowledge management
  • Investment processes
  • Adequate Investor servicing
  • Technology-enabled risk monitoring systems
  • Performance attributing tools.

All these elements make the fund house more performance-centric and risk prudent.

And with respect to the fund manager, make sure that the fund house has employed an experienced fund manager who can make a considerable difference in the fund’s performance. Look at his track record before making any decision.

Pro tip: Investors can check the performance of other schemes managed by the fund manager and can perform a relative comparison of the returns of different types of schemes handled by him.

7) Fund Rating

There are many independent research agencies which perform fund ranking and rating based on various criteria’s like:

  • Performance
  • Risk
  • Portfolio quality

Investors can cross check these ratings to validate the fund. However, these ratings are based on past performance and do not indicate that the fund will perform better as it did in the past.

Conclusion:

Just like any investment, mutual funds require homework and a good research if you want to maximise your returns. Above-mentioned are some parameters for an investor to choose the best mutual funds for 2018.

If who have limited knowledge or time, find yourself a good investment advisor to assist you in an informed decision-making process.  Also, remember that it does not stop at just the selection phase, you need to follow and monitor the mutual fund scheme from time to time.

So, proceed cautiously and take calculated steps!

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