How To Compare Mutual Funds?

Those who are pretty much aware of the market sentiments can find a mutual fund scheme quite easily. But what if you're a novice investor? You wouldn't want to depend on luck for the mutual fund to work in favor of you. The market is flooded with various schemes and fund types that are clamoring for your attention.For seasoned investors, choosing the right mutual fund isn't a complex task because they know the rules. If you're clueless about finding the best deal, you need to ace the art of how to compare mutual funds.Before knowing what parameters you should make for the comparison of funds, let's understand why it is significant:When you're exploring the mutual fund investment sector, you will come across a variety of schemes. Prior to making a long-term or short-term commitment, most investors analyse the returns factor, which is known from the difference between net asset value at the beginning of investment and net asset value at the end of the period.It is also necessary that you consider the performance consistency and assess the risk-return ratio. Returns cannot be the only concluding parameter to get the right mutual fund. Hence, you need to compare it, keeping in mind the following factors.

Benchmark: One of the advantages of comparing benchmarks is knowing how much a fund has produced against how much it was supposed to deliver. For instance, if the index has increased by 14%, and the fund has grown 16%, this benchmark indicates that it has outperformed the index. Using this parameter, you will know which fund can perform well when the market is positive.Risk factor: When you're investing in mutual funds, you have to bear a certain risk for the type of fund you choose. High-risk funds generate high returns. However, you need to analyze the funds based on alpha and beta . Alpha indicates how much return the fund can derive, while beta shows the risk associated with the fund. When you're comparing mutual funds, you need to choose the one which will help you to beat the benchmark rather than matching it.Expense ratio: This is yet another important factor when you are making the comparison. Mutual funds managed by asset management companies (AMC) or agents come with an expense ratio. The ratio is the annual fee charged by the mutual fund managers for managing your portfolio. The expense ratio directly affects the returns in the sense that higher expense reduces the profit you would get in hand. While comparing, make sure you are comparing equity with an equity fund rather than debt plans.Type of underlying securities: Sector allocation is also one factor you should consider as a mutual fund investor. While comparing two funds, you will notice that the sector allocation of underlying assets will vary in several cases. The type of underlying assets affects the risk profile of a fund.Investment horizon: This represents the time period of holding mutual funds. Investors can either have short-term or long-term horizons depending on the goals. Equity mutual funds are suitable for long-term investors, while liquid funds are ideal for short-term investments. If you choose an equity scheme, you should compare the returns of the two schemes for the past 5 to 10 years. Similarly, you should check the past six months' performance while deciding between liquid funds.Before you decide to go ahead with a fund, you must clarify the fund's risk, objectives, and various other factors. It will definitely help you zero down on a fund that truly suits your goals.

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.