Mutual fund investment plans have emerged as a preferred investment choice for a large number of investors in the last few years. Earlier, most of the households invested their savings in traditional investments like FDs, PPFs, and gold. However, the need for better returns from their savings and growing awareness of other investment options, have led investors to move away from traditional investments and explore other options such as mutual funds.
What are mutual funds?
In simple words, mutual funds are pooled investments from a large number of investors. They collect money from various individuals and entities that have a common investment objective and subsequently invest this pool of money in various stocks, bonds, and other securities.
Thus, mutual fund investment plans allow you to distribute your invested money in a large number of securities than you could put in your portfolio. As a mutual fund investor, you hold units that represent a portion of your holdings in the scheme.
Why is it advantageous to invest in mutual funds?
Mutual fund investment no doubt is one of the smartest investments for almost any investor. Here are a few of its advantages:
A mutual fund is the simplest way to invest in capital markets for higher returns. If you are a novice but wish to invest in the capital markets, then mutual funds provide you with the simplest platform to invest in a healthy mix of stocks, bonds, and other securities.
2. Easily accessible
Mutual funds’ investments are easily accessible for all investors and as an investor, you can start investing in mutual funds for an amount as low as Rs. 500.
Mutual funds allow you to diversify your portfolio as you can gain access to different segments of the market through various mutual fund investment plans. Thus, you can invest in a variety of assets, sectors, securities, etc.
4. Professionally managed
Mutual fund schemes are professionally managed by fund managers who have the expertise, time and resources and make sound investment decisions based upon the objective of the scheme.
As the number of mutual fund schemes available in the markets has increased dramatically, evaluating the performance of mutual funds is of utmost importance to make wise investment choices. If you are wondering which is the best mutual fund to invest right now and how to evaluate the performance of mutual funds, then here is a simple guide for you.
Top 5 measures to evaluate the performance of a mutual fund
1. Compare performance with an appropriate benchmark
For every mutual fund, there is a benchmark index to which you can compare the mutual fund performance. If your mutual fund investment is consistently generating higher than the benchmark, then it reflects the ability of the fund manager to manage the portfolio better. The important aspect here is to compare the mutual fund performance with an appropriate benchmark.
Even when you are comparing it with different mutual fund schemes always look at the returns of other funds from the same category with a similar investment objective. Comparing the performance of a midcap fund with that of a large-cap fund would be like comparing apples to oranges. Hence, be careful and make relevant comparisons to see the performance of mutual funds.
Alpha of the fund helps measure the performance of the mutual fund on a risk-adjusted basis. Alpha takes into account the volatility of the mutual fund and compares the risk-adjusted performance of the fund to the benchmark. A positive alpha indicates that the fund manager has managed to outperform your mutual fund investments as compared to the benchmark. Similarly, a lower alpha indicates an underperformance of the fund as compared to the benchmark. Thus, the more positive the alpha of a fund, the better it is.
Apart from the risk associated with the security due to the nature of the asset class, every investment is exposed to a systematic risk which is due to the state of the economy or market in general and is unavoidable.
The beta ratio captures this market risk of your investment. A higher beta indicates that the fund will be more volatile than the market. So, if a fund has a beta of 1.15 then it is 15% more volatile than the market.
Note: Alpha & Beta both are risk ratios and are crucial means to find out the performance of mutual funds. The two ratios help you to determine the returns generated as compared to the risks undertaken. As an investor, you should look at funds that have a higher alpha and lower beta.
4. Portfolio diversification
The advantage of investing through mutual funds is that they help you diversify your portfolio. A well-diversified portfolio helps you to mitigate the risks associated with investing in funds focussed on too few stocks or sectors or asset classes. So, to ensure that you achieve the desired results, you should review the holdings in your mutual fund. You can check the portfolio of your mutual fund by looking at the fund fact sheet.
5. Expense Ratio
One of the biggest challenges for mutual funds is the high fees associated with it. Running any mutual fund involves costs that need to be borne by the investor. The expense ratio is the percentage of money spent to pay the salary of the fund manager, his team and other expenses. So, if the expense ratio of a mutual fund is high then it will reduce the overall returns generated by your mutual fund investments. So, while choosing a fund you should also see that the expense ratio is not very high.
Here is a list of best mutual funds for 2019 across popular categories you may consider for investing now:
The Bottom Line
Choosing to invest in mutual fund investment plans is just the start of your journey as an investor. The important aspect of any investment decision is that it helps you achieve your goals within the desired time frame and considers your tolerance to risk. Mutual fund portfolios are tailor-made to meet your unique goals and are one of the best ways to achieve your investment objectives.
So, if you want help with your mutual fund investment portfolio or you want to find the best mutual funds to invest now or simply want guidance, you can always seek assistance from a platform like IndiaNivesh. Their experts will help you build a portfolio that’s best suited for you.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.