How to Compare Mutual Fund Offerings with Vital Parameters?

Mutual Funds are a popular investment tool that can help create wealth provided you make an uninformed choice. The big question is how to find the right scheme from the plethora of options out there. What should you do? Invest in funds that look attractive, or are suggested by friends and agents? Not the right approach.Mutual funds require thorough research and a lot of deliberation to understand their unique features. The key is to compare various funds in the same category to nail a product that aligns with your risk profile and investment goals. Read on to learn more.

Before generating a comparison to spot differences between offerings, it's important to narrow down your options for investing in mutual funds. A comparative screener tool can help shortlist stocks on parameters such as preferred Fund House, type of Scheme (equity, debt, hybrid, & commodity), and Ratings (0 to 5). Following the selection of funds based on the screening criterion, you can start a detailed comparative analysis of the following criteria.

• Accurate Benchmark Index Benchmark is an index that helps gauge the efficiency and overall performance of a mutual fund. It’s the indicative value of what the scheme has generated against what it should have. SEBI (Securities and Exchange Board of India) enforces each fund in the financial market to declare a benchmark index. If a fund surpasses the benchmark, it is deemed to have outperformed its peers and generated an alpha. In contrast, if the index drops, the fund has underperformed.
• Risk Element Investment in mutual funds comes with an element of risk. The general assumption is that very high-risk instruments generate high returns. Not entirely true! It is important to study and analyse ratios like beta and alpha to measure the risk factor and return potential.
• Portfolio Allocation Strategy Mutual funds invest your money in a variety of asset classes under their objective. As per SEBI regulations, each fund has to follow a certain mandate in terms of allocation strategy. For example, an equity fund has to invest at least 65 percent of capital in equity shares of different companies. When comparing two schemes, it's important to check the sector and asset allocations to ensure it is in sync with your financial goals.
• Applicable Fees Price is another parameter that can be used effectively to compare mutual funds. A fund house charges investors an expense ratio. It is an annual fee to cover the scheme's management, administration, advertising, and operating expenses. The expense ratio directly impacts take-home returns as it is expressed as a percentage of the fund's daily net assets. Different products have different expense ratios.
• Competence of Fund Manager The fund manager is responsible for investment decisions and stock selectionof the fund.His experience,competence, and expertise in the domain can play a pivotal role in the scheme's performance.

Now that you have some clarity on comparing mutual funds using a screening tool and various parameters, go ahead and start investing. However, if doubts persist, consult a financial advisor for guidance to help you build the right portfolio.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.