How do you evaluate mutual funds schemes? Here are some key factors you should consider

You must evaluate mutual fund schemes based on specific parameters considered characteristic of suitable investments. Typically, the variables used for assessing a scheme depend on the asset class the fund represents.

For instance, for equity funds, Rinju Abraham, Vice President of Scripbox, says one must consider the following variables:

Longevity of the fund: Assessing the fund’s track record and duration of existence.

Fund size: Look at the size of the fund concerning other funds in the category. Larger funds are preferred.

Outperformance consistency: Look at the consistency of the fund’s outperformance. A fund with high consistency is preferred.

Rolling returns (12 months): Consider the average 1-year return the fund has delivered over an extended period.

Rolling returns (3 Years): Consider the average 3-year return that the fund has delivered over an extended period

The volatility of outperformance: Consider how volatile the outperformance over the benchmark has been. Lower volatility is preferred.

Downside protection measure: Look at how resilient the fund is to market downtrends. A fund that has shown a higher resilience is preferred.

Upside participation measure: Consider how well the fund has been able to participate in up moves in the market. A fund that participates well is preferred.

For debt funds, while variables such as longevity of funds and size are the same as equity funds, there are a few new additions, says Abraham.

Performance consistency: Look at how predictable the fund’s returns have been. Also, you must prefer funds that have higher predictability.

Rolling returns: Consider average return for a specified holding period over a pre-determined time horizon

Read more  The 8 Best Ways to Invest in Real Estate in Nigeria: A Comprehensive Guide

Market perception of portfolio quality: Look at how the market assesses the risk in the underlying portfolio. Also, you must prefer funds with a consistently lower risk than peers.

Internal view on credit quality: Assess the credit quality of the underlying holdings in the fund. The higher the credit quality, the better it is

Consistency of credit quality: Consider the stability of credit quality over time. A consistently high credit quality is preferred.

Sensitivity to interest rate changes: Consider how sensitive the fund is to changes in Interest Rates

Performance relative to peers: Consider the performance of the fund relative to its peers

Fund size: Look at the size of the fund concerning other funds in the category. Larger funds are preferred.

Each variable carries a weightage in arriving at a final fund evaluation. As mentioned above, the evaluation criteria don’t depend on investor types, whether conservative or aggressive. It is thus important to perform the basic checks before choosing a fund. “Implementing the factors mentioned above can be adjusted by assigning different weights to each parameter based on the investor’s type or preference. For example, a conservative investor who may not like seeing a material fall in portfolio value may assign a higher weight to factors such as downside protection, etc. This allows for customization while maintaining the fundamental evaluation framework,” said Abraham.

When evaluating a mutual fund scheme before investing, Yashoraj Tyagi, COO & CTO at Sqrrl, a wealth management platform by CASHe, explains the following factors that one should consider while investing in a mutual fund scheme.

Firstly, clearly define your investment goals, time horizon, and risk tolerance to ensure the selected scheme aligns with your objectives. Thoroughly research the fund’s investment objective to ensure it matches your financial goals, whether you seek growth, income, or capital preservation.

Read more  How To Invest In A Startup

Analyse the scheme’s historical performance across different periods, comparing it to relevant benchmarks and peer funds to assess consistency and relative performance. Additionally, evaluate the expertise and track record of the fund manager(s) responsible for managing the scheme, ensuring their investment approach aligns with your investment philosophy.

Assess the fund’s expense ratio, representing the annual fees charged by the fund house, as lower expense ratios can positively impact overall returns.

Consider the fund’s AUM size, considering potential challenges that excessively large funds may face in managing investments effectively.

Carefully review the scheme’s offer document, prospectus, and key information memorandum to understand the investment strategy, associated risks, and costs.

Finally, consider ratings from reputable agencies, as they offer valuable insights into the scheme’s quality, risk profile, and performance relative to peers. By considering these factors, investors can make well-informed decisions that align with their financial goals and risk appetite.