How to compare Mutual Fund Schemes?
It becomes difficult when you are told to choose mutual fund scheme
from a plenty of schemes floating in the market. Investors
tend to get confused when they want to invest but are not sure as to which scheme is good for them or which scheme would give good returns as compared to other similar schemes.
Besides, there is danger in choosing a product purely based on its past performance without giving much thought to other factors such as charges, downside risk, consistency of performance etc. Mutual fund investors
often make the mistake of investing in a mutual fund scheme
that has given very high returns in very short time. So, it becomes important that one chooses the right scheme. Now, how will a person be able to choose a right scheme? If a person is planning to invest in a diversified equity mutual fund scheme and see a list of more than 200 schemes, he will definitely get confused. Comparison between schemes is essential in order to know which scheme is better. To compare mutual fund schemes there are a few parameters to compare them which will be discussed in detail.
- Absolute returns
Absolute returns measure how much a fund has gained over a certain period. So you look at the NAV on one day and look at it, say, six months or one year or two years later. The percentage difference will tell you the return over this time frame.
Absolute returns can be used as a basis for comparison when you compare between similar funds. Eg, Returns of a diversified equity fund can be compared with other diversified equity funds. You should not compare it with a sector fund which invests only in companies of a particular sector.
While comparing mutual fund schemes
on the basis of returns, one should ensure that the returns are compared on the basis of a same period of time.
If you are comparing equity funds then you must use three to five-year returns. And if you are comparing liquid funds then 6-month returns would be suitable.
- Benchmark returns
Benchmarks are a standard of comparison of mutual fund performance. It basically indicates what the fund has earned against what it should have earned. One can say that the benchmark’s returns are the MF schemes target and the scheme is expected to have done well if it manages to beat its benchmark.
Let’s say there is a mutual fund scheme which considers Sensex as its benchmark. Now suppose the Sensex rises by 20% over a year and the fund rises by 30% over the same time period, then it would mean that the fund has outperformed. And if an opposite situation occurs where Sensex rises by 20% over a year and the fund rises by only 10% over the same time period, then it would mean that the fund has underperformed.
Benchmarks are not only relevant when the market is positive but also when the market is negative. Suppose a fund has lost 20% as compared to the 30% fall in the benchmark, then it would mean that the fund has outperformed.
- Fund portfolio
The fund’s portfolio
has to be evaluated to determine the risk and return in the scheme. It helps the investors to know the kind of securities in which their funds are going to be invested. It is a good way in order to know the risk associated with the schemes. An equity oriented scheme is riskier as compared to a debt scheme
A ranking is a good way to know where the scheme stands. CRISIL Mutual Fund Ranking is the relative ranking of mutual fund schemes
within a peer group. It gives an idea about the standing of the scheme amongst a group of related schemes. Only open-ended schemes are considered for comparison. The following table gives the interpretation of each rank.
- Expense Ratio
Expense ratio states how much you pay a fund in percentage terms every year to manage your money. Expenses tend to reduce the returns of an investor. To make the choice between two similar funds, you should consider the expenses charged by them. Lower expenses benefit you in the longer term. Usually, schemes with higher assets have lower expense ratio than that of a small sized fund.
Nowadays it is has become easier to make a comparison between schemes with the help of mutual fund comparison tools. In that, you only have to search for the funds you are wishing to compare and then with a click you’ll get a comparison of the schemes on all the above parameters. It gives a detailed comparison which helps the investors in making a decision, as to which mutual fund scheme to choose.