When you thought to invest in mutual funds and try to search for fund then you may end up into 1000 of funds. Which makes you into dwindle position in choosing funds.
So, I thought to help you in this regard and try to make you familiar with few new terminologies too. When you decided about the tenure of your investment and type of fund like Equity, Debt or Liquid funds then the last thing you need to do is to compare which one is best fund to invest for. For example when your tenure is for long term and want to invest in Equity-Large Cap oriented funds then you may end up with so many choices of funds. But how to judge the fund performance? Below are the few basic things you must know.
1) Each fund have it’s own logic of investment and targeted customers. Hence first check whether it’s investment style matches with your goal or not.
2) I will not say “Never invest in NFOs (New Fund Offer-means new funds entering into market)”. But try to avoid utmost as you may not have any historical data to judge it’s performance. Also when so many choices are available to choose from existing and old funds then why need to take risk in investing NFOs.
3) Fund must be oldest with consistent well performer. Hence better to choose the Fund House which is oldest one instead of new entrants. Few funds may perform well for shorter tenure. Hence dont judge by the short term well performance of the fund. Instead choose the fund which has given good returns since long.
4) Check for it’s AUM (Asset Under Management), because fund expenses are inversely related with expenses. Hence larger AUM means lesser expenses.
5) After those few points, you need to search for few technical performance of the fund which I will discuss below.
A) R-Squared-It is a statistical measure which indicates how much is the movement of fund in line with the Index. High R-Squared means it is highly matching with the Index performance which it is following.
B) Beta- It indicates the volatility of fund with respect to market movement. Suppose beta of fund 1 means it is exactly following market. Less than 1 means less volatility than the market. Hence more than 1 beta means high volatility which may give more return but with higher risk too.
C) Alpha- In simple terms to explain it is “A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an under performance of 1%.”
D) Standard Deviation-It is again the measurement of volatility of fund. Suppose high standard deviation means high volatility where as less means less volatility .
E) Sharpe ratio- This is very important thing to judge whether the fund returns are due to smart investment decisions or due to excessive risk of fund manager. The greater a fund’s Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the fund being analyzed.
The above mentioned few points are basic things you need to look for before choosing the funds. I hope these points will help you in choosing a better fund for your investment. Happy Saving!!!