Mutual fund ranking – do not depend on the past data

This article appeared in the December issue of Money Today….

Financial Trainer

If past records were enough to predict the future, the result of every match would be known even before it started. Similarly, if the past performance of mutual funds was the only barometer, no fund investor would ever lose money. In reality, this is never the case. So all investors should take mutual fund ratings and recommendations with a pinch of salt. To identify whether a fund works for you, look for the following:

Risk taken by a fund manager: Base your decisions on “risk-adjusted returns”. Risk is measured using standard deviation or beta.

Processes of fund houses: If it is a good fund house, it will have a seamless operation with a definite investing philosophy. This means that if a key person in the organisation leaves, it will not affect the fund’s performance. Also, consider the track record of the manager.

Nomenclature: If a fund says it is a large-cap fund, it must buy only large-cap shares. Also, check the amount of cash that the fund sits on. If you have invested Rs 5,000 in a large-cap fund, you want the fund manager to buy shares worth Rs 5,000, not to sit on Rs 3,000.

Returns in the very long term: Pick a period that covers both bull and bear markets. This reveals whether the fund has been able to weather all business cycles. If you are number savvy, use the monthly moving average and compare it with the risk-adjusted return, that is the return divided by standard deviation. You will be able to compare the performance of funds better.

Where it fits in your portfolio: Sometimes, a second-best fund could work because its risk profile suits you more than the top fund. So don’t be hassled by tiny differences in returns between funds.

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