PowerMF Blog – Empower Yourself

For investing in a mutual fund scheme, choosing the right scheme is very important. The following 6 parameters will be useful in order to idenfity a right scheme.

1. Scheme Objective and its suitability to you

The ‘Objective of the Scheme‘ ( detailed info in earlier blog post ) is the goal the scheme wants to achieve by investing in various securities. Generally, this also provides for the length of investment that is ideal in the scheme. One should necessarily take this into consideration while deciding on the scheme he is interested in investing. One of the ways to look at the schemes is through grouping the schemes with similar objectives . Generally schemes are categorized in various categories and sub categories. PowerMF segregates the schemes under various categories depending on the asset class the scheme invests in and sub classes based on investment objective of the scheme under these asset classes

Equity Schemes:

Schemes which have investment in equities as the main objective.  There are various sub categories under equity schemes, some of which are: Diversified Schemes; Mid Cap Schemes, Small Cap Schemes, Schemes focusing on specific sectors like Banking, Technology etc. Theme based schemes like Infrastructure, Service Industries etc. ELSS Schemes, ETFs, International Equity etc.

Debt Schemes:

Schemes which invests mainly in various debt securities. Some of the sub categories under this category are: Gilt Schemes, Floating Rate Schemes, Liquid Schemes, Fixed Maturity Plans etc.

Hybrid Schemes:

Schemes which invests in both Equity and Debt securities. Some of the sub categories under this category are: Balanced Schemes, Arbitrage Schemes, Monthly Income Plans etc.

2. Scheme Structure & Parameters

One of the key objectives of an investor in an investment, in addition to returns and risk is the ease with which you can sell back your mutual fund units once you’ve bought it (also known as liquidity), Scheme structure (ie., if the scheme is open ended or close ended) is an important consideration when someone invests in a particular scheme. Also, it is important to understand if the scheme has any lock in period. When you are looking at easy liquidity, it is always better to look at an open ended scheme which provides the necessary liquidity.

Other parameters about the scheme which have to be considered include minimum amount of investment, lock in period if any, periodicity of declation of NAV, Portfolio etc.

3. Past performance of the scheme

There are various ways by which the performance of a scheme can be analysed.

Standalone Performance of the scheme

One of the most common ways to analyse the performance of the scheme is to look at the returns of the scheme as on date over various periods. Ideally, you should look at the performance of a scheme over the period for which the scheme is recommended and planned to be invested for.

It’ll also be useful to check the performance of the scheme over a period of time. The performance of a scheme across various periods will help you understand the impact of different market conditions on the performance of the mutual fund. Also, this will ensure that the impact of recent development in the market does not unduly influence your decision. For this reason, PowerMF provides not only returns as on date for various periods, but also the quarter wise returns over the past 8 years or since the commencement of the scheme whichever is later.

Performance vis-a-vis Benchmark & Other Similar Schemes

Another important factor in identifying a scheme is the relative performance of the scheme. Each scheme has a benchmark which is generally an Index whose performance can be tracked. Also, one important factor is to ensure that the comparison is done only along with schemes of similar nature.

In most cases, schemes are put in various quartiles depending on its ranking amongst other similar schemes. However, more than just the ranking, it is the absolute returns which is more important. Hence, on the PowerMF platform, the performance of the top scheme as well as the bottom scheme in this group along with the performance of the benchmark is provided. This will provide clear understanding on the comparative performance of the scheme.

Risk Adjusted Returns

When comparing performance of a scheme, it is important not to get too caught up only with the returns and the ranking. It is also important to see the risk taken for getting the returns. There are various measures that are there to check the risk adjusted returns. Some of the measures are: Beta, Sharpe Ratio, Beta Square etc.

4. Scheme Portfolio

A scheme gets its returns based on the portfolio in which the funds collected have been invested in. Hence, it is important to look at the portfolio of the scheme. Some of the key parameters to look at are:

Asset Allocation

Exposure of the Scheme to various asset classes like Equities, Derivatives, Debt and Cash.

Stock and Sector Concentration

This provides for the concentration of the portfolio. One of the objectives of investing in a mutual fund is to get diversification across various stocks and sectors. Hence, one should look at the concentration of the portfolio among top 5 stocks and industries in order to understand the true diversification a scheme offers.

The portfolio and its analysis

The recently declared portfolio of various schemes is available on the PowerMF platform. Further, analysis of the equity portfolio across Sectors as well as across index groups is available and similarly, for the debt portfolio, type of securities as well as rating wise analysis are available. This will provide a complete understanding of the portfolio.

5. Brand

In addition to the performance of the scheme, the AMC and its brand also have its say while selecting a scheme. While good brand alone does not mean good performance, a good brand helps the AMC in its ability to attract the right talent and manage the performance. Hence, a product from a well known and more importantly well managed and consistently performing brand both in terms of AMC brand and in terms of the fund manager will provide the necessary comfort to the investor. Also, generally a brand name gets built over consistency of performance and acceptance of the market of its products. A few areas which need to be focused are:

1. AMC (Asset Management Company) background and its promoters
2. Assets Under Management of the AMC, Fund Manager and the Scheme
3. Awards and recognitions won by the Scheme, Fund Manager / AMC

6.   Cost

Cost also plays an important role in the identification of the scheme. (Refer our previous blog post to understand the costs associated with Mutual Fund Schemes ) as the costs get accounted for in the NAV (Net Asset Value), the returns comparison generally takes in to consideration the cost. However, it is still important to understand the costs in the scheme in order to understand the impact of costs in the schemes performance. As the costs directly impact the returns in a scheme, higher cost will eat in to the returns for the customer. This needs to be kept in mind while deciding a scheme for investment.

While there are maximum allowed expenses that can be debited to the scheme by an AMC, each scheme has a different cost structure. The details are available in the Scheme Performance Snapshot in PowerMF.

If you consider all the above 6 points while deciding a scheme for investment you will be able to identify the right scheme to invest in.

Hope you found this post useful. Do let me know your comments.

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Fundu Vishy

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