With so many AMCs and thousands mutual fund schemes, there is choice overload for mutual fund investors. Different AMCs have different approaches, styles and value systems in doing business. An investor has to be comfortable with the AMC, before investing in any of its schemes. Most of AMCs offers almost similar types of mutual fund schemes, however their performance may vary as per their capabilities.
An investor buying into a scheme is essentially buying into its portfolio which may e viewed on their website on a monthly basis. While equity investors would like to see sectors and companies where the scheme has taken higher exposure, long-term investors tries to develop views on AMCs/ Fund Managers that are more persistent in identifying changes in market trends. Similarly a debt investors would ensure that the weighted average maturity of the portfolio is in line with their view on interest rates viz. Higher weighted average maturity during periods of declining interest rates; lower weighted average maturity, and higher exposure to floating rate instruments during periods of rising interest rates.
SEBI has categorized the Mutual Fund schemes to make it simpler for investors to choose from the choice over load. As such, SEBI mandated AMC to launch only one scheme in one category i.e. Equity, Debt, Balanced and Thematic, etc. However, even after that step, their are 32 categories and still it will be too much with so many AMCs in place.
The parameters that a investor may look at while selecting schemes within a category, are as follows:
Track Record
Mutual fund schemes publishes their performance on periodic basis and as such also states their track records in different time horizons like One day, one week, One month, On year, two year, 3 years, 5 years and since inception. Consistency in performance is always preferred than a sudden jumps. Investors planning to invest for long term should more focus on long term return however short term investors may choose as per the flavour of current market.
Age of a Fund
Old is gold. In contrast to a new mutual fund, a old mutual fund will have a long history and a proven track record (or at least a track record) that can be studied. A new fund managed by a portfolio manager with a lack-lustre track-record is definitely avoidable. Age of a fund is especially important for equity schemes, where there are more investment options and divergence in performance of schemes within the same category tends to be more.
Operating expenses
Any cost is a drag on investor’s returns. Investors need to be particularly careful about the cost structure of debt schemes, because in the normal course, debt returns can be much lower than equity schemes. Similarly, since index funds follow a passive investment strategy, a high cost structure is generally avoidable in such schemes.
Tracking Error
Among the index schemes, tracking error is a basis to select the better scheme. Lower the tracking error, the better it is. Similarly, Gold ETFs need to be selected based on how well they track gold prices.
Regular Income Yield in Portfolio
Persistence in the regular incomes of schemes like dividend income in equity portfolio, interest income in debt portfolio or capital gains defines the persistence in funds performance. Regular incomes are seen as a more stable source of income than capital gains. Therefore, a high regular income yield is a strong positive for a scheme.
To make a complex task simple, there are mutual fund research agencies which assigns a rank to the performance of each scheme within a scheme category (ranking). Some of these analyses cluster the schemes within a category into groups, based on well-defined performance traits (rating). Every agency has its distinctive methodology for ranking / rating, which are detailed in their websites. As such, Investors should understand the broad parameters, before taking decisions based on the ranking / rating of any agency.
Some research agencies follow a star system for the rating. Thus, a 5-star scheme is better than a 4-star scheme; 4-star scheme is better than 3-star, and so on and so forth. Quarterly performance ranking of schemes over a period of time shows that the best ranking fund in a quarter is not necessarily the best ranking fund in the next quarter. Therefore, seeking to be invested in the best fund in every category in every quarter is neither an ideal objective, nor a feasible target proposition. Indeed, the costs associated with switching between schemes are likely to severely impact the investors’ returns.
The investor should therefore aim to stay invested in schemes that are in the top “few” in their category on a consistent basis. The “few” could mean 3 to 5, in categories that have few schemes; or the top 10-15%, in categories where there are more schemes. Investors need to bear in mind that these rankings and categories are based on historical performance, which may or may not be repeated in future. The investor also needs to remember that beyond performance of the scheme, loads make a difference to the investor’s return.
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