How to choose a good mutual fund


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As you scan the list of mutual funds, what are the filters that help you cut through the clutter and pick that one perfect avenue which fits your investment objective.

Updated on 27th May 2011

Published in: Economy & Finance
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How to choose a good mutual fund

  1. 1. How to choose a good mutual fund?
  2. 2. The 1 st Mutual Fund was born in 1924, when 3 Boston money managers pooled their money together. Through the decades this simple concept has grown into one of the biggest industries in the world. Investors now have a plethora of options to choose from; to handpick that one mutual fund in which they can place their trust and hard earned money. With so much at stake, what should an investor look for in a mutual fund? Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing. For detailed risk factors, see slide #13
  3. 3. Start with an Experienced, Disciplined Management Team Look for a firm that has experience on its side Your ideal Mutual Fund company should have at the helm of its management a team of strong investment analysts / portfolio managers with experience of managing money through market cycles If this kind of a management has succeeded in building a team of talented and disciplined individuals around them, you know that your money will be in good hands.
  4. 4. Pay Attention to the Expense Ratio Even a mutual fund needs money to work The percentage of assets that go toward running a fund – the management advisory fee and basic operating expenses – is known as the Expense Ratio . This expense ratio is the amount a mutual fund has to earn just to break even before it can even begin to start growing your money. Take for example, 2 funds. All else being equal, Fund A has an expense ratio of 1.50%, and Fund B has 0.50%. Here, Fund A has a much bigger hurdle to beat before you start making gains Over the long run, the difference in these expenses compound to larger dents in your wealth. Expense Ratio
  5. 5. The Fund’s Philosophy must match with your own There are different philosophies about managing money: Value Investors look for businesses that they believe are trading at a substantial discount to their intrinsic value. This causes them to buy very few businesses each year and, over time, has led to very good results. Others believe in Growth Investing which means simply buying the best and fastest growing companies (almost) regardless of price. Still others believe in owning only blue chip companies with healthy dividend yields . Find a mutual fund that shares the same investment philosophy you do
  6. 6. Avoid Mutual Funds with High Turnover Ratios Don’t get misled by high rate of returns. Remember that your aim as an investor is to end up with the most money after taxes Every time your fund buys or sells shares for their portfolio, they would need to pay taxes, and this expense in turn is deducted from your returns Turnover rate is the percentage of the portfolio that is bought and sold per annum by a mutual fund Be wary of funds that habitually turnover 50% or more of their portfolio Such high turnover rates seem to convey that the fund managers are unsure of their investment thesis and the reason for owning the investments they do
  7. 7. Look for Diversification of Assets Diversification is a vital necessity when it comes to investing in Mutual Funds Simply owning different mutual funds that specialize in the real estate sector is not diversification. If the real estate market collapses again, your portfolio would be devastated. <ul><ul><li>Don’t own funds that make heavy sector or industry bets. </li></ul></ul><ul><ul><li>Don’t keep all of your funds within the same fund family. </li></ul></ul><ul><ul><li>Spread your assets out at different companies, to counter the risk of internal turmoil, breach of ethics, and other internal problems. </li></ul></ul>
  8. 8. Don’t underestimate Risk! While looking for your fund, take a look at its “Sharpe Ratio” & “Volatility” Sharpe Ratio is used to characterise how well the return of a fund compensates you for the risk taken. Eg: When you buy a lottery ticket, you are taking quite a high risk. You may end up losing all your money or maybe you could make equally high gains. Say you purchase Rs 100 ticket, and win Rs 300. How well do you think that the gain of Rs 200 compensated you for the risk taken while parting with the Rs 100. The measure of how well your returns compensates you for the risk you take is referred to as – Sharpe Ratio. For your mutual fund investments, higher the Sharpe Ratio, the better!
  9. 9. Consider this: A & B study mathematics together. Below are their scores: Take a look at both their performance. Though A has outperformed B in Test 2, Student B seems to be more consistent. With respect to mutual funds, if the NAV of the fund moves up and down rapidly over short time periods, it has high volatility. If the NAV growth is close to consistent, it has low volatility. Before you ‘Risk’ your savings… Generally the more volatile a fund, the higher the investment risk. 70 30 Test 3 55 75 Test 2 60 35 Test 1 Student B Student A
  10. 10. Remember: The 4Ps Does the fund house follow a value philosophy, or do they follow a growth philosophy?  All fund houses cannot be good in following all philosophies. Normally they would tend to be good in one or the other.  How long have they managed money for? Do they have the experience of seeing the markets during good and the bad cycles?  Does the fund have a good process to identify investments? Is the portfolio construction team biased? Or is it based on the whims and fancies of a star fund manager?  Philosophy People Process Performance If all the above mentioned criteria are satisfactorily addressed then a good fund performance will automatically follow. It will be predictable and it will reflect the philosophy being followed.
  11. 11. The other questions to ask: Is the fund house launching too many products and as a result confusing the investor?  Are there too many changes in the fund management team? Does the fund house have adequate research staff? Does the fund house make adequate disclosures of its performance numbers? Does the fund house give prominence to corporate governance? Is the fund house monitored by an able compliance team? And finally you have to ask yourself Does the fund meet your needs in terms of returns expected vis-à-vis the risk undertaken to generate those returns?
  12. 12. Choosing a fund is the most important task in investing. A wrongly chosen fund can severely damage your savings. Hence choose wisely and invest well!
  13. 13. Risk Factors: All Mutual Funds and securities investments are subject to market risks including uncertainty of dividend distributions and the NAV of the schemes may go up or down depending upon the factors and forces affecting the gold and securities markets and there is no assurance or guarantee that the objectives of the scheme will be achieved. Past performance of the Sponsors and their affiliates / AMC / Mutual Fund and its Scheme(s) do not indicate the future performance of the Scheme of the Mutual Fund. Investors in the Schemes are not being offered any guaranteed / assured returns. The NAV of the units issued under the Schemes may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities. The NAV will inter-alia be exposed to Price / Interest Rate Risk and Credit Risk . Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsors: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and the Investment Manager are incorporated under the Companies Act, 1956. The past performance of the Sponsor / AMC/ Fund has no bearing on the expected performance of the scheme. Mutual Funds investments are subject to market risks. Please read the Scheme Information Document (s) / Key Information Memorandum (s) / Statement of Additional Information / Addendums carefully before investing. Scheme Information Document(s) / Key Information Memorandum(s) / Statement of Additional Information can be obtained at any of our Investor Service Centers or at the office of the AMC :- 505, Regent Chambers, 5th Floor, Nariman Point, Mumbai – 400 021 or on AMC website www.QuantumAMC.Com/ This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall not be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in the responses.