Fundamental Analysis For Mutual Funds

Nutan Gupta

30 Jan 2017

Fundamental Analysis takes into consideration various elements like the revenue, expenses, and income of the company. It also looks at the growth prospects of the company and management of the company. The fundamental analysis approach is based on the overall macro-economic factors which can have an impact on the stock. Fundamental Analysis is a long-term investment strategy.

There are some fundamental factors one should consider while investing in mutual funds.

Sector Prospects of the Fund

Every mutual fund has a certain amount of exposure to a particular sector. While investing in a mutual fund scheme, look at the sector in which the fund has the highest exposure to and how that sector is performing. It is not wise to only look at the past performance of the sector. It is very important to analyse what the sector has in store for its investors in the future. Also, one needs to analyse the impact of macro-economic conditions on that sector as a whole.

Financial Valuation of the Fund

The financial valuation of a mutual fund can be determined by its P/E (price to earnings) ratio. The P/E of a scheme is derived by using a weighted average of underlying stocks. Basically, it is the average of the P/E of all the stocks that are present in a fund’s portfolio.

A higher P/E ratio of the scheme indicates that the stocks in the scheme are valued at a premium. This reflects a growth-based approach of the fund manager. On the other hand, a lower P/E indicates a conservative approach of the fund manager. Here, the fund manager looks for stocks whose stock prices have been beaten down and there is a hope for these prices to rise significantly in the future. Such stocks yield great results over a longer period of time.

Ratios

Ratios are used to identify the given amount of risk attached to a mutual fund.

Sharpe Ratio

This ratio is used to calculate the risk-adjusted return. It is calculated as -

Am-Rf/Std

Where, Am is the Arithmetic Mean of the portfolio being evaluated

Rf is the Risk Free Rate

Std is the Standard Deviation of the portfolio being evaluated

Sortino Ratio

This ratio measures the performance of an investment relative to the downward deviation. It is calculated as -

(R)-Rf/SD

Where, (R) is the expected return

Rf is the risk free rate of return

SD is the standard deviation of the negative asset return

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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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Fundamental Analysis For Mutual Funds

Nutan Gupta

30 Jan 2017

Fundamental Analysis takes into consideration various elements like the revenue, expenses, and income of the company. It also looks at the growth prospects of the company and management of the company. The fundamental analysis approach is based on the overall macro-economic factors which can have an impact on the stock. Fundamental Analysis is a long-term investment strategy.

There are some fundamental factors one should consider while investing in mutual funds.

Sector Prospects of the Fund

Every mutual fund has a certain amount of exposure to a particular sector. While investing in a mutual fund scheme, look at the sector in which the fund has the highest exposure to and how that sector is performing. It is not wise to only look at the past performance of the sector. It is very important to analyse what the sector has in store for its investors in the future. Also, one needs to analyse the impact of macro-economic conditions on that sector as a whole.

Financial Valuation of the Fund

The financial valuation of a mutual fund can be determined by its P/E (price to earnings) ratio. The P/E of a scheme is derived by using a weighted average of underlying stocks. Basically, it is the average of the P/E of all the stocks that are present in a fund’s portfolio.

A higher P/E ratio of the scheme indicates that the stocks in the scheme are valued at a premium. This reflects a growth-based approach of the fund manager. On the other hand, a lower P/E indicates a conservative approach of the fund manager. Here, the fund manager looks for stocks whose stock prices have been beaten down and there is a hope for these prices to rise significantly in the future. Such stocks yield great results over a longer period of time.

Ratios

Ratios are used to identify the given amount of risk attached to a mutual fund.

Sharpe Ratio

This ratio is used to calculate the risk-adjusted return. It is calculated as -

Am-Rf/Std

Where, Am is the Arithmetic Mean of the portfolio being evaluated

Rf is the Risk Free Rate

Std is the Standard Deviation of the portfolio being evaluated

Sortino Ratio

This ratio measures the performance of an investment relative to the downward deviation. It is calculated as -

(R)-Rf/SD

Where, (R) is the expected return

Rf is the risk free rate of return

SD is the standard deviation of the negative asset return

Have Referral Code?