How Do Investors Compare Mutual Fund Schemes?

Investing in mutual fund schemes in India may seem a challenging decision. Most of the investors regard fund returns as the only criteria to compare the performance of funds.

Generally, mutual fund scheme is made up of investments in equity, debt or a mixture of both. They can be further classified structurally as open-ended or close-ended mutual fund schemes.

However, comparing the performance of mutual fund scheme is not such a simple thing and involves assessing other parameters.

 

1.   Benchmark

Analyze the performance of the fund with respect to the benchmark. While comparing mutual fund schemes one can consider a parameter as a fund which gains more when the market rises and loses less when the market falls.

 

2.   Investment period

Investment horizon relates to the time period within which the investor wishes to invest in the given fund. For instance, equity funds are suitable for a long-term investment period. The fund objective for this period generally would be wealth creation at relatively high risk.

If you wish to invest surplus funds for a short term, investors may consider liquid funds as an option for investment.

 

3.   Risk

According to the investment thumb rule, higher the risk higher the chances of reward . Hence, while comparing mutual fund scheme performance, one may use alpha, sharpe and beta ratios to calculate the inherent risk-reward potential of a mutual fund. Sharpe reveals the amount of return per unit of risk. Alpha tells how much extra return the fund achieves over and above the benchmark.

Suppose two funds Fund A and Fund B have a Sharpe ratio of 1.8 and 2; respectively, here, Fund B depicts higher risk-adjusted returns than Fund A.

 

4.   Expense ratio

It is an annual fee levied by the fund house on unit holders to manage the portfolio on their behalf. A higher expense ratio reduces the profits earned by the investors. Look for a fund that has the lowest expense ratio in the given category. Direct plans have a lower expense ratio than regular plans because there is no distributor commission. Equity funds have higher expense ratio because of higher transaction costs and brokerage than debt funds.

 

5.   Sector Allocation

A mutual fund scheme allocates the invested capital according to its investment objective. With reference to asset allocation, SEBI has given a mandate, which every fund in a particular category follows. However, two funds belonging to the same category need not have similar sector allocation.

Fund A might invest more in financial services, whereas Fund B might have major investments in FMCG companies while maintaining SEBI mandate.

 

While comparing two funds, analyse the sector allocations also. Ensure that the fund risk profile aligns with your risk appetite and choose accordingly.

 

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.