How to Pick the Best Equity Mutual Fund?

Priyanka Sharma

21 Apr 2017

New Page 1

Choosing the right equity Mutual Fund from a large pool of available equity schemes is perhaps the most crucial aspect of your equity MF investment. To begin with, you need to be clear on factors such as past performance of the scheme, how it compares with peers and the benchmark, the volatility measures and risk adjusted performance of the scheme, scheme size, and expense ratio of the scheme and so on.

Here are some pointers to guide you to pick the right equity MF

Investment basics:

Before you start investing, you need to identify whether the need of the investment is short-term, which could be needed for say the down payment of a car, or long-term (retirement planning or for children’s education or wedding). Also, a lot depends on the extent of risk an investor is willing to undertake and the performance of a scheme over a period of time.

Picking the right fund house:

Do some research and identify fund houses that have a strong presence in the financial world, making them most probable candidates for providing funds that have a reasonably long and consistent track record. Experts argue that when it comes to fund houses, a strong parentage ensures efficient processes and the capability to build a strong business.

The idea is to get a fair assessment of the performance of fund over a period of time. An equity fund could give you over 100% returns at a time when the equity markets were witnessing a bull run, but the same fund might witness a drop in net asset value (NAV) when the markets were volatile. Instead of advising in such funds, it is advisable to look for funds that consistently outperform its benchmark over 3-5 years.

Weigh your options: Risk versus returns

An investment in securities inadvertently comes with certain risks, and for obvious reasons, if returns are not in proportion to the risks taken then the investment is not worth it. A good mutual fund is one which gives better returns than others for the same kind of risk taken. Some indicators of the performance of the MF should used to assess them. These are Sharpe Ratio, which is excess return given by the fund over return given by a risk-free instrument divided by a statistical term called Standard Deviation, which tells how volatile the returns of the fund have been over a period.

Know more about your fund manager:

Do not underestimate the importance of an efficient fund manager. Go through the performance of funds managed by him, especially during periods when markets went through difficult times. An investor should try to find out if a fund manager has expertise over different investment categories, and should gain from it.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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How to Pick the Best Equity Mutual Fund?

Priyanka Sharma

21 Apr 2017

New Page 1

Choosing the right equity Mutual Fund from a large pool of available equity schemes is perhaps the most crucial aspect of your equity MF investment. To begin with, you need to be clear on factors such as past performance of the scheme, how it compares with peers and the benchmark, the volatility measures and risk adjusted performance of the scheme, scheme size, and expense ratio of the scheme and so on.

Here are some pointers to guide you to pick the right equity MF

Investment basics:

Before you start investing, you need to identify whether the need of the investment is short-term, which could be needed for say the down payment of a car, or long-term (retirement planning or for children’s education or wedding). Also, a lot depends on the extent of risk an investor is willing to undertake and the performance of a scheme over a period of time.

Picking the right fund house:

Do some research and identify fund houses that have a strong presence in the financial world, making them most probable candidates for providing funds that have a reasonably long and consistent track record. Experts argue that when it comes to fund houses, a strong parentage ensures efficient processes and the capability to build a strong business.

The idea is to get a fair assessment of the performance of fund over a period of time. An equity fund could give you over 100% returns at a time when the equity markets were witnessing a bull run, but the same fund might witness a drop in net asset value (NAV) when the markets were volatile. Instead of advising in such funds, it is advisable to look for funds that consistently outperform its benchmark over 3-5 years.

Weigh your options: Risk versus returns

An investment in securities inadvertently comes with certain risks, and for obvious reasons, if returns are not in proportion to the risks taken then the investment is not worth it. A good mutual fund is one which gives better returns than others for the same kind of risk taken. Some indicators of the performance of the MF should used to assess them. These are Sharpe Ratio, which is excess return given by the fund over return given by a risk-free instrument divided by a statistical term called Standard Deviation, which tells how volatile the returns of the fund have been over a period.

Know more about your fund manager:

Do not underestimate the importance of an efficient fund manager. Go through the performance of funds managed by him, especially during periods when markets went through difficult times. An investor should try to find out if a fund manager has expertise over different investment categories, and should gain from it.

Have Referral Code?