Mutual Fund investments can be a tricky affair as simple it might look but as we all know the devil lies in the details. So, how can you assess the best mutual fund in any category?
Well, there are a lot of Mutual Funds categories like large-cap, mid-cap or Flexi cap, etc. and then there are more than 20+ schemes in each category, to effectively assess a scheme you can follow the 5 P’s approach by Morningstar i.e. parent, people, process, performance & price.
Parent:
While investing for a longer duration, one needs to consider the Mutual Fund Company (AMC) floating the fund. You need to consider the Brand history and reputation, their manager turnover, investment culture, quality of research, ethics, directors, legal cases and proceedings, etc.
If you hold a fund for 10+ years, you would look for stable management that will be there the whole way through, what you would like to avoid is frequent switches within management and key personnel.
Further different management comes with different investment philosophies and styles, which may or may not suit your investment needs.
People:
A mutual fund scheme is run by its people, so, it is very crucial to understand the people behind them. It’s not only the fund manager but, there are the analysts, traders, and other managers who contribute to the process, and you need to consider them too. Their expertise, experience, and skills will ultimately lead to the success or failure of the scheme.
It is also important to evaluate whether the people are sticking with their company or not, frequent changes can be of bad taste, as the overall success of the fund would depend on the fund management team.
Process:
There’s a wide variety of fund strategies that can be employed even within a category: Let’s take the example of a large-cap growth fund and you will see whether the manager is taking a momentum-based approach or focusing more on growth at a reasonable price.
Are there any Competitive advantages? Whether the manager is doing something unique or can it be copied by anyone? Is the strategy a well-tested formula one or a new one?
We invest in Mutual Funds for their expertise in fund management and the core of the expertise lies in the process that they follow to generate higher alpha and minimize risk at the same time.
Performance:
Indeed, past performance doesn’t guarantee future success but it does speak a lot about how the scheme fared as compared to its peers and the benchmark.
You need to assess the performance of the fund under the current manager. Also, evaluate the various risk metrics to understand the risk and reward that the scheme has to offer. At the same time analyzing how the fund performed in different market environments and its consistency of returns over time is important.
Price:
Costs are the last part of the puzzle; here, you need to look at the expense ratio and exit load compares it with other schemes within the category. In short, you need to check the cost of the funds before investing in them.
In case you are wondering if it’s too much of a job, that’s where the Mutual Fund Distributor and Investment Adviser comes into play.
Written by: CA Suraj Kar
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