Selecting the right Equity Fund is a daunting task, many people keep on postponing their investments because it takes so much effort to select the winning fund. If you are one of those people and don’t want to undergo this daunting task luckily there are two options.
First, you can invest in Index funds, there has been lot of studies that claim ~80% of the actively managed funds fails to beat the performance of index fund.
Second, we have analysed all the mutual funds in India, you can to schedule a call with us here Consult Us, we will help you create an investment plan best suited for your goals and investment objectives.
Even if you buy fund yourself or consult us knowing this checklist will help you to choose the right fund based on your investment objective. There are many investment products available and you must understand which one is right for your needs rather than investing on the hype of marketing.
1) Fund’s Investment Strategy – This is the very first think you should look for and make sure the fund’s investment strategy aligns with your objective, time horizon and risk tolerance needs. For example, if you need regular monthly income, there are lot of dividend yield funds that will suit your objective. If you feel a certain sector is going for bull run, there are sectoral funds.
Understanding your investment objective and aligning it with the fund’s investment strategy is must.
2) Fund’s R squared – It indicates the relationship between a fund’s return and the benchmark market index. You don’t want to invest in a fund with very high R squared (let’s say 95%) that fund is similar to index, but charging high fees with little opportunity to add value over benchmark market’s return.
3) Beta– Beta is a measure of risk. It indicates a fund’s past price volatility relative to a benchmark. Beta gives you an idea of general volatility in fund asset values.
4) Total cost of ownership – If cost of ownership is high, then your net returns will decrease. Check for fund’s expense ratio & portfolio turnover. Many people tend to ignore portfolio turnover, high turnover leads to high transaction costs and more chances of realizing capital gains tax.
5) Fund’s Market Capitalization – It tells whether the fund emphasizes on the stocks of blue-chip companies with large market capitalization, emerging companies with small market capitalization or something in between. There is no right or wrong average market capitalization but knowing this gives you a sense of investment philosophy of the fund.
6) Basic fund checks – How much is the AUM of fund? How long has the fund been in the market? Reputation of Fund’s sponsor company? Tenure of Portfolio Manager
There is no fixed right answer for the above 6 checkpoints. You have to evaluate whether these points align with your investment objective or not. This is a highly subjective process and takes several iterations, the fund that is best for your friend might not be best for you. It’s important to understand & appreciate this point.
For more details, you can also refer to our detailed study on Mutual Fund Analysis.
A financial advisor can help you determine the right products based on your investment objective. Feel free to schedule a call with us Consult Us, we will help you create an investment plan best suited for your goals and investment objectives.