Parameters to keep in mind while choosing a mutual fund
Let us clarify the fact that the best mutual funds do not mean the best of returns. You need to opt for one that aligns with your risk appetite and financial goals in the long run. One of the biggest mistakes people end up doing is to choose a mutual fund based on the performance itself and that too based on the recent performance. Many investors merely flip through the star ratings produced by the various agencies. For example aditya Birla sun life mutual fund has lot of takers. Not only the star ratings, there are others parameters that you need to take into consideration before choosing a mutual fund.
For the long term performance of any scheme how it ranks among the peers should be looked at. To obtain clearly information about the ranking you need to observe quartile ranking and in a peer group how the fund has performed on a quarter by quarter basis.
As an investor you can choose a mutual fund that has remained in the top quartile all the time. From the various AMCs these rankings can be obtained.
Though there are various ratios, among all of them you need to check out the ALPHA of a fund. This would give you an idea on what the fund manager has generated with your portfolio as compared to the benchmark.
In simple terms this is the performance ranking of a fund manager. You have to check out how often the fund manager has generated positive alpha.
In the choice of a mutual fund scheme expense ratio is another important point of consideration. All distribution and fund management expenses are to be taken care of by the scheme. What it means is that high expense ratio is going to have adverse effect on the performance of a fund.
The tenure and experience of a fund manager
In the performance of a fund, the role of a fund manager is really important. In fact you can term it as a process oriented approach, but in the long run the experience and tenure of the fund manager counts a lot. Just note down who is the fund manager of your scheme and gain an idea about the performance.
Just flip through the performance of the various other funds that he is managing. For example, if the fund manager of a scheme has changed of late there is no particular reason to panic. Just keep an eye on the performance by having a look at the alpha and compare the quarter to quarter performance.
If you find that there is a reasonable change in the performance of a fund due to change of a fund manager then a decision has to be made in order to exit the fund.
To conclude, by now you might have observed that all of the above factors are overlapping in some form or the other. In fact review is the only way to find out more about the funds.