There are different categories of investors. Some are risk-prone; some are cautious. This divides the universe of investors in two distinct groups i.e. active investors and passive investors. Passive investors look for capital appreciation. However, not like aggressive equity investors.
Security of money invested is also important. Snazzy equity market hardly appeals to all, because of its inherent high risk. However, investing in a mutual fund can be a safe option to park money, with a satisfactory return. There are funds that have given over 20% annualized return in the last 10 years- money doubling in 5 years time! Is that not impressive?
Past performance, volatility measure, expense ratio, track record of the portfolio manager, risk adjusted return, etc. are but some primary things to consider before selecting a top performing scheme.
Let us focus on some important points that should be considered while selecting a mutual fund scheme.
- The pedigree of the fund house: Subscribe to schemes launched by fund houses that have a strong presence in the market and sustainable business model. Their investment decision, building portfolio, risk measure and operational efficiency significantly influence the long run growth prospect of an MF scheme.
- Risk-Return trade-off: Every investment has some degree of inherent risk. A scheme is not an exception either; ideally, return should justify the risk taken. A good investment option is the one that has a higher yield than other investment options with the same risk profile. Risk adjusted return is the best measure of judging the performance. One may use Sharpe ratio to find out extra return that a scheme generates for each unit of risk taken. The return of a fund is generally compared against the risk free return e.g. returns from government bonds, bank term deposit, etc.
- Degree of diversification: Well diversified portfolios have a lower risk and thus they sustain to generate a stable return in the long run. Diversification may be done on the basis of asset class, the risk profile of asset, types of stocks, geographies, etc. Before investing, one must check the portfolio history of a scheme on the website of the fund house.
- Expense ratio: expense ratio refers to the annual expenses incurred by the scheme as a percentage of its total asset holding. In the long run, the schemes having a lower expense ratio are more likely to grow, and outperform others with a higher expense ratio. Schemes with low expense ratio have more funds to invest in assets. Generally, expense ratio ranges from 2-2.25%.
While selecting the top performer amongst funds, one should carefully gather information about these four parameters to analyze the data, and discover the top performing one to invest.