Here you are faced with a dilemma as to which Equity Diversified mutual fund should I pick up. Oh there are so many hundreds of mutual funds. Which one is the best for me? How do I analyse these mutual funds ? What do I need to know in order to analyse these mutual funds? All these questions must be running through our minds .Remember every day is not Sunday. Always invest prudently and wisely .I would like to remind all of you that the team of Financial Planners at IndianMoney.com are always there for you to plan your Mutual Fund needs in a most efficient manner. You can explore this unique Free Advisory Service just by giving a missed call on 022 6181 6111.
How To Rate An Equity Diversified Mutual Fund
Always Go For The Long Haul
Here remember always run a marathon and not a 100 meter dash .Here a mutual fund may give unusually high returns in a short time frame such as a year. Beware of this kind of fund. You might say why beware..This fund is performing giving awesome returns. However it is prudent to note that too much of a good thing can be a bad thing .Here this is like a hundred meter dash. Strong performances need to survive the test of time. Always go for a fund which performs well over a long period of time. Another reason are these short term performing funds attract a lot of investments. It is always easier for the fund manager to manage smaller investments as we note a bike can navigate small roads better than a truck. Here a higher rating is given to a mutual fund which performs over a long period of time. Remember it is always important to get over the finish line and not fall before it. Assign a higher rating to a mutual fund which performs for a long term frame.
Measure The Returns Of A Mutual Fund
Here in a mutual fund we have the Growth Option and the Dividend Option. In the Growth option the profits are reinvested in the fund. This increases the NAV of the fund .In a Dividend option the profits are distributed to the investors as dividends. Here we need to analyse and check if the fund is a Growth option or a Dividend option .If we have an investor who takes high risks for high returns he would be interested in the Growth fund. Here a young investor who has a high risk taking ability invests in a growth fund and an elderly pensioner who needs a regular monthly income invests in a Dividend fund. Here we assign a higher rating to a Growth fund over a Dividend fund if we want high returns on high risks.
Always Be Aware Of The Charges In A Mutual Fund
Here Equity Diversified Mutual funds had an entry load of 2.25% which was removed in August 2009. Here funds charge an exit load of 3% if funds are redeemed within 6 months of allotment or at 2% if funds are redeemed within 2 years of the date of allotment .Here always be aware of the exit loads charged in these funds which might include administration fees, Sales and Distribution fees, Management expense ratio which might be very high. Here one charge you must give due importance is the management expense ratio. The management expense ratio gives us an idea of the amount of the funds charges that are diverted towards the sales charge. Here a low management expense ratio means a higher rating. Here annual expenses involved in running a mutual fund include administration costs, management salary and other overheads. Expense ratio is the percentage of assets that go towards covering up of these expenses. Here higher the expense ratio and management expense ratio a lower rating is assigned
Reputation Of The Fund House And The Fund Manager
Here the reputation of the fund house plays a very important role in the performance of a mutual fund. Don’t we all invest and make our purchases on the reputation of brands? If it is shoes it may be Nike .Cars it may be Audi..Similarly the reputation of the fund house matters and a higher rating is provided to a more reputable mutual fund house. So What Does A Fund Manager Do?
- Makes Decisions based on Research that go far deeper than just mere performances and risk evaluation.
- Conducts Qualitative and Quantitative analysis for the purpose of making an informed decision
- Monitors the changes in the economy, Studies the regulatory rules, Studies Economic Techniques and uses decision making skills.
- Studies the market conditions and market cycles and movement of commodities.
- Represents the fund by speaking to the Media, Regulators, Industry Leaders and the Investors.
- Mutual fund managers should always try to beat their benchmark index.
- A mutual fund manager should try to lower the expense ratio and improve the rating of the mutual fund house.
Here a good mutual fund manager makes a good and a reputed mutual fund house. This assigns higher rating to the mutual fund.
Risk And Risk Adjusted Returns-A Measure Of Volatility
Let us understand this concept by comparing 2 Equity Diversified mutual funds .Let us imagine that an Equity Diversified mutual fund invests in just a set of 3-4 stocks .This gives us a return of 15%.Another Equity Diversified mutual fund invests in a number of different kinds of stocks across various sectors. This also gives a return of 15%.Here we notice that the returns are the same. Here both are Equity Diversified mutual funds. However the size of the portfolio varies. Bigger the portfolio more is the diversification. This lessens the risk associated with a largely diversified mutual fund. Here an investor prefers this kind of a fund as it gives large returns against a lesser risk. Here while comparing a funds performance it is very necessary to check the risk exposure of these funds. This is very important while analyzing historical returns. Here we also have to consider risk adjusted returns. Here we have a measure of risk which gives us certain returns. This basically measures how much risk is necessary to produce those returns.
How To Read Those Greek Words Which Measure Risk And What Do They Mean
- Standard Deviation is used to measure volatility. Here we have average returns. Standard Deviation measures how much the returns have fluctuated above or below the average returns. Here a high value of Standard Deviation means a highly volatile fund. Here let us consider a Standard Deviation of 15%. Here we have a fund which gives us an annualized return of 10%..Here this means that historically the fund has given a return in the range of -5% to 25%.
- Sharpe Ratio : This measures how much returns are generated per unit of risk. Here a higher value of Sharpe Ratio means that the fund generated higher amounts of return while taking on lesser risk. Here we have the difference of the returns generated by the fund where we subtract the risk free rate of return which is basically the return from a Government Bond or a treasury bill and divide by the Standard Deviation.
- Beta : This is basically a measure of the funds volatility when compared or benchmarked to a given index. A Beta of 1.0 means the funds movements correlate with that of the index and if the index goes up by 8% so will the returns of this kind of a fund. Here the Beta value is 0.80 which means the fund is 20% less volatile than the benchmark Index. Here the Beta value is 1.2 which means that the fund is 20% more volatile than the benchmark index. Here a mutual fund with a lower Beta is suitable for investors taking lesser risks. A negative Beta means funds returns move in the opposite direction to the index.
- Alpha : Alpha is basically the difference between the actual returns and the expected returns. If it is positive the funds return beats the benchmark index. If it is negative the funds returns are lesser than the benchmark index. Here a positive value of Alpha is preferable.
Here we can assign a rating for the Equity Diversified Mutual fund based on the values of the following :
- A low Standard Deviation is a measure of less volatility
- A High value of Sharpe Ratio means higher return with a lesser risk
- Here a mutual fund with low Beta is suitable for investors taking lesser risks
So How Do You Assign A Rating For A Mutual Fund
- Here people generally rely on the ratings provided by Morning Star and Lipper which use a ranked system of rating for mutual funds
- Morningstar uses star rating with the best being a 5 star rating.
- Here Morningstar categories funds based on 9 Categories. Large Size, Large Blend and Large Growth. Medium Size, Medium Growth, and Medium Blend. Small Size, Small Blend and Small Growth. Here funds are classified based on valuation and market capitalization in order to classify them in the above groups.
- Here Lipper does not compare the performance of one Equity diversified mutual fund with another Equity diversified mutual fund. But compares the performance of an equity diversified mutual fund with a benchmark index.
- This reflects the areas where the fund invests, the amount of flexibility used by the fund manager and the extent to which the fund is aggressively managed by the fund manager.
Here I would like to end this article with the phrase "Hard Work Breaks No Bones". So I would advise all my readers to follow this principal and do not compromise on the Studying and Analysis of the Equity Diversified Mutual Fund. You can always look up the website IndianMoney.com for your complaints and queries regarding mutual funds