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!!!

13 Responses

  1. Dear Basu,
    I have a plan of 16 yrs & 24yrs of investment plan for my daughter’s edu and marriage respectively(1 yr old).
    For this purpose i have analysed crisil rankings and had eyed on below:
    Large cap-sbi blue chip fund
    Diversified- uti mnc fund
    Small mid cap- birla sl mnc fund.

    Can u please suggest ur viewpoint around these funds considering the 2 purpose of investment.
    I Want to do sip with 2k every month.

    1. Joy-Don’t rely too much on these rankings. Will you change the funds when the same CRISIL downgrade the fund you invested? Instead try to adopt the module by using the above criterias and select funds.

    1. Basu ji Sorry actually I am not able to see my comment due to some technical reasons and the above mistake happened.

      Pls reply.Your valuable answer is highly appreciated.

      Thank You
      With Warm regards

        1. How to maintain the portfolio pls give me detailed idea.and what are funds to select form the list for 15yrs.
          As a central govt employee what are all the precautions I have to take.

          Thank You
          With warm Regrds

          1. Pradeep-You have to review it once in a year and re-balance the portfolio. If you don’t know how to do and which funds to select then go with an adviser. Being central government employee means nothing special to equity investment. But a long-term investor is in need for wealth creation in equity market.

            1. Hi Basu ji what I mean to say is(Being central government employee) should I have to inform office reg investment in equity market or I can invest as much as I can.
              One more doubt is after reviewing the fund in three yrs if the fund not performed to its level then how should I shift to another fund and what about my previous investment and time.
              Pls i am eagerly waiting for your answer.

              Thank You
              With warm Regrds

              1. Pradeep-There is no such rule in India where employee must inform to employer about his investment. When your goal is 15 years, then why you think of worrying of equity market after 3 years? But you have to worry when your fund not perform well. Hence, you must review once in a year.

  2. Hi Basu I am following your Blog from few days but I became a great fan and now I am very much interested in reading your articles which a layman can also understand easily .Your blog will help many to gain a lot of knowledge and to create wealth on own.Thank you very much for this.Now my question is that I am a central gov. employee with monthly salary of 40k and i want to invest a sum of 10k for a long period i.e. up to 15 yrs for creation of wealth to my child education and house.My age is 26 and My child age will be 1yr by this Dec.Pls suggest me some best funds and how should my Portfolio will be in order to fulfil my necessities.

    Waiting eagerly for your valuable reply.

    Thank You
    With Warm Regrds

  3. Hello Sir / Mam,

    I want to invest 1000 Rs per month through SIP in Franklin India Smaller Companies Fund .

    Please advise whether it is a good fund to invest in .

    My age is 28 years , annual income is 5 lacs . I am married and have one child (boy ).

    Please guide me and suggest other good funds to invest in equity.

    Imran Ali
    Alwar Rajasthan

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