Selecting the right investment avenue is like choosing your better half that matches the ambitious pursuits that you’ve set for the life. The mutual fund, being one of the most trending alternatives, is now controlling trillions of dollars of assets and allowing all class of investors a means to generate compounded wealth via lumpsum and SIP investment mode.

People invest in these instruments to get better returns with the ample of choices available to pick from. However, with so much at stake, what is that one should look for in a mutual fund scheme? The handy step by step process given by the online experts at MySIPonline will help you out to make the process easier for yourself and give you some peace of mind as you sift through the thousands of available funds. So, just sit back, grab a cup of coffee, and go through the guidelines below; we promise in no time you’ll start feeling like a mutual fund pro!

Here are the significant steps that are followed for the selection of the best mutual funds in India for oneself including:

1. Filtration of Funds

2. Performance Analysis: Risk and Return Test

3. Portfolio Analysis

Step 1: Filtration

1. Assets Under Management or AUM > Rs 50 Crores

According to experts, one must select a scheme which holds at least Rs 50 crore. Assets Under Management is one of the essential attributes which tells how popular a scheme is among investors. Secondly, a good amount of AUM helps the fund manager in buying stocks of companies that have reasonable valuations in the market and create a portfolio for the fund that is well diversified.

2. Existence of the Fund > 3 Years

The second important thing for the filtration process is checking the inception date or birthday of the respective fund. This being one of the crucial checks to shortlist a potential mutual fund as a new or inexperienced fund holds no track record. So, it is complicated to judge how it will perform under different market conditions. Therefore, a small window of at least three years is required to check the same in the filtration zone.

3. Fund Manager’s Experience and Performance Record

Check what kinds of bets he/she has taken in the upside and downside markets. Also, see how the other funds that he/she has been managing perform. As mutual fund investors, we’re often advised to opt for a scheme which suits our investment objective and risk appetite. This step of filtration will help one in checking whether the fund manager is making risky bets or not. The fund manager’s investment style and strategy are the keys to determining the future returns of the scheme.

Step 2: Analysis of Performance

Here, the performance analysis should be done to check two of the other crucial aspects, which are:

1. Fund Management Capabilities- Return Test

2. Risk Management Efficiency- Risk Test

Let’s discuss the two tests mentioned above in detail now.

Return Test

1. To perform the return test, first of all, the long-term returns are checked which also include the returns since the launch of the particular scheme. This will help one in finding out what kind of returns the scheme has produced till date in the various years after its inception. Further, the investor can check if the consistency of the average returns since launch is maintained or not.

Further, trailing returns of the last 5, 3, and 1 year along with the year to date (YTD) returns should be checked. The consistency of the returns can be analyzed using the rolling returns of the scheme in different periods.

Lastly, the upside ratio should be taken into watch which brings clarity on the aspect as to how the fund has beaten the benchmark and its peers in the favorable market and by how much. If the value of the upside ratio is greater than 100, then it depicts that the fund has outperformed its benchmark with a good margin, and vice versa.

This test is done to know how the fund has performed wholly in different market cycles and periods. However, one important aspect is still uncovered which is the risk factor. This one determines if the returns that the fund is delivering are in line with the risk it attracts. Thus, here comes the next segment of performance analysis, which is the Risk test.

Risk Test  

1. To check the risk, first and foremost thing to see is the inherent volatility of the fund which is measured with the help of the Standard Deviation.

2. The second part is where the market sensitivity of the scheme is checked using Beta as the parameter. Its value shows the performance of the fund when the market is volatile.

Now, other statistical factors including the Drawdown ratio, Downside Standard Deviation, Downside ratio, etc., should also be checked. Here, if the Downside ratio is less than 100, then it shows that the fund has outperformed its benchmark in the negative market periods as well and vice versa.

4. Lastly, here comes the Risk to Reward ratio of the fund. The value of this parameter shows how the fund has performed as compared to the per unit of risk it has taken. The three ratios fall under this one- Sharpe Ratio, Treynor Ratio, Sortino Ratio.

This brings one to the final step of analysis of a mutual fund, i.e., portfolio analysis. Read further to know how it is done!

Step 3: Portfolio Analysis

This final step is done to project the short-term and long-term future possibilities of the fund. Along with this, the portfolio also tells how good a particular fund is concerning quality and sustainability. Here the first thing that one should look for is the fund’s investment strategy, stock selection, and entry and exit calls of the stocks in which the fund has invested in.

Investment Strategy: Investment strategy of any particular fund can be either growth-oriented or it can be value-oriented or merely a blend of the two.

Fund’s Allocation: The fund’s market cap allocation and sector-wise allocation are checked here in this part. In the market cap allocation, one gets to see in which segment of the market cap the fund has invested the most. It could be in giant, large, small, or mid-cap. It could have also invested in debt instruments and cash and cash equivalents.

If the investment is more in small and mid-cap, then the fund is highly risky. Similarly, if it is in giant and large-cap companies, then the fund would be defensive.

Sector Allocation: There are several sectors in which a particular scheme’s assets are invested in to seek benefit. The conventional classification is done into three: cyclical, defensive, and sensitive sectors.

If the fund holds a good amount of allocation in sensitive and cyclical sectors, then the fund can be more sensitive and aggressive. If the investment is more in defensive sectors, then it implies that the fund manager believes in taking less risky bets.

This brings us to the last step, which is individual stock analysis.

Stock Fundamental Analysis: Every particular stock in the portfolio should be checked based on several measures. These are growth ratios, profit earning ratios, and valuation ratios.

Profit Earning Ratios can be checked using the following values of the stock:

1.Net Profit Margin

2.Return on Equity

3.Gross Profit Margin

4.Operating Profit Margin

Similarly, in the valuation ratios, parameters such as P/E ratio and P/BV ratios are needed to be examined.

The Final Result of Analysis

After all these steps, the investor would be able to gain clarity on how the fund can perform in the future and what are the factors on which the fund is dependent on. Now comes the primary step for which all these efforts were put in, i.e., the selection of the fund.

Pick the funds that fulfill the following checks:

Attractive fund manager’s capabilities

Consistency performance and sound risk management

Growth-oriented portfolio for better future returns

Final Take

We hope the steps as discussed above will help one analyze a mutual fund scheme on its own. Just follow the process as defined above and choose ideal funds for yourself, be it large cap, mid cap, small cap, or ELSS funds. The key to gain better wealth is investing in the right investment avenue at the right time. So, you must follow the procedure and take the benefit of the ongoing volatile market to gain exceptional returns in the future. Happy investing!


Published by Charlesa Gibson