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How to compare mutual funds?

  • Akshatha Sajumon
  • Jan 12 2022
  • 7 minutes
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Mutual funds are becoming a preferred investment avenue for investors considering the flexibility and ease of investing in them. Mutual funds provide a wide range of investment options across various asset classes and categories, which gives the investor many choices. Still, it can be quite overwhelming for a new investor to choose the right fund. Further, most funds within a category look similar, considering that they have the same investment theme or strategy.

Therefore, before investing your hard-earned money in mutual funds, it is important to examine mutual funds available that suit your financial profile thoroughly. Comparing mutual funds helps make it easier to pick the right one.

Comparing mutual funds does not mean just comparing their performance or returns, but a variety of parameters that will ultimately determine how well the fund turns out to be.

Here are a few parameters you need to factor in comparing mutual funds.

Factors to consider while comparing mutual funds

Matching your investment aim 

While there are various mutual funds within each category, each mutual fund scheme comes with an investment aim. For example, equity-oriented mutual funds usually have an investment aim of growth. Further, you can differentiate mutual funds based on their strategy as value funds, contra funds, and thematic funds. In the same way, debt mutual funds also have differing objectives. For example, liquid funds are an ideal avenue to park one’s money for up to a year. It is important to know the investment objective of a mutual fund to ensure that it aligns with your investment goals.

Considering performance benchmark

Each mutual fund is pegged to a particular benchmark or index, enabling one to compare the mutual funds’ performance. For example, an equity mutual fund may be benchmarked to the Nifty 50 Total Return Index (TRI). Now if the index rose 13% over the last year, but the fund NAV rose only by 8%, it means that the fund underperformed relative to the index. Such a comparison can help you determine the consistency of the mutual fund’s performance to the benchmark index. Go for a fund that has consistently beaten the benchmark.

Evaluate risk levels 

Every mutual fund comes with a different risk level. All schemes provide a riskometer, informing you about the level of risk your money will be at if you invest it in that scheme. For example, equity fund schemes will be riskier than debt mutual fund schemes. Simultaneously, a small-cap equity mutual fund will be riskier than a large-cap fund. Although the higher risk comes with higher returns, choose a mutual fund that aligns with the risk level you are comfortable with. 

  Lower cost or lower expense ratio 

This is one of the most important parameters when comparing mutual funds. The expense ratio is the cost or annual fees the fund house charges to provide management and administration services to investors. The expense ratio directly affects your returns. Therefore, it is necessary to check for expense ratios across funds in the same category. Choose a fund that has a lower expense ratio within the category.

Besides, from 2013, investors can invest in “direct plans” instead of “regular plans”. The regular plans involve payments of commission to distributors, and hence, a higher expense ratio. Thus, with a direct plan, the expense ratio is much lower, as it does not include the commission given to distributors of brokers. This results in a better return than the regular plan of the same scheme.

Timeframe for investment

Investment horizon or the time frame for investment is the time you wish to stay invested in a particular mutual fund. To decide which mutual fund to invest in, consider looking at the mutual fund’s investment horizon, and check if it is in line with your goals. For example, invest in equity-oriented funds if your investment horizon says 5 to 7 years. If it is for the short term, you may go for debt funds or liquid funds.

Years of existence and track record

Mutual funds may see several market ups and downs. What matters is the track record of the mutual funds over the years. You would need to consider the number of years of the scheme’s existence and fund house existence to gauge the experience levels. Consider evaluating the fund manager’s years of experience and performance across all funds they manage. The growth in the fund house’s size of assets is also a vital parameter to watch out for.

Underlying securities and asset/sector allocation

Check for asset and sectoral allocation within the mutual fund scheme wherever applicable. For example, some funds may invest more in debt instruments such as bonds and less in stocks. Ensure that it aligns with your risk appetite and financial goals before you select the scheme.

Historical returns 

Historical returns, when seen in isolation, are not a good indicator of a mutual fund’s performance. However, if you compare historical returns over a while in tandem with other parameters as well, it can give you a good idea of how the mutual fund has performed vis-à-vis other funds in the category across different market cycles. It is an indicator of the consistency of the fund’s performance.

How can you compare mutual funds with the Finity app?

Finity is an app-based avenue for investing in direct mutual funds with ease. 

On the app, you can invest in all categories of mutual funds based on your risk tolerance, investment horizon, investment goals, etc. 

The Smart Fund Engine of Finity app enables the investor to invest in top-performing mutual funds. The funds are selected on various critical parameters through Finity’s proprietary research methodology.

How does the Finity Smart Fund Engine work?

We have a robust and tested research methodology to recommend the best set to you. We cover a range of factors such as:

  • Minimum 3-5 year track record.
  • Performance and returns over multiple time horizons: 1 year, 3 years, and 5 years (additionally 6 months for debt).
  • Performance in bull and bear markets, during upward and downward movement of interest rates.
  • Performance of fund manager in other schemes, and over time.
  • In case of debt, funds with limited or no exposure to private sector corporate debt (especially real estate and construction, but also other sectors like paper, logistics, FMCG, NBFC, etc). For other sovereign debt, we usually only consider funds with banking and/ or PSU debt in the portfolio.
  • In the case of debt, less or more exposure to the yield curve, based on the tenure of the investment.

So, can you see how we take into account all the factors mentioned above to evaluate mutual funds so that you can compare mutual funds and choose the right fund for yourself? 

Amid the thousands of mutual fund schemes available in India, selecting a mutual fund is difficult. Choosing a mutual fund that is right for your financial goals and needs is important, considering that you are investing your hard-earned money. Mutual fund comparison can help you understand a lot about the finer details of a fund you consider investing in compared to other funds. It can also give confidence in selecting a scheme that is best for you.

Like any other investment, mutual fund investments also require a tailored approach, as your goals and risk profile may differ from others. A thorough comparison between mutual funds can help you invest much more efficiently

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