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5 easy steps to select a diversified equity mutual fund

17

(30-Aug-2012 )

You must have read a lot of material on how to evaluate a mutual fund scheme as well as on how not to evaluate a mutual fund scheme. And to make things difficult there a plethora of mutual fund schemes available in the market to choose from. With 44 asset management companies (AMC) currently in the mutual fund industry offering more than 450 schemes (under diversified equity category) the choice is not that easy. So it can be a challenge for you when it comes down to identifying a handful of mutual fund schemes from this rather large universe. The good news for you is that based on performance, most of these schemes fall short of making the grade. But then the real challenge lies in finding those few schemes that do make the grade and are worthy enough to be a part of a well performing mutual fund portfolio. But when it comes to investment decisions many of you appear confused due to similar looking schemes in terms of investment objective, risks and returns. The simplest of decisions prove elusive to you. Moreover, this confusion is further enhanced by misrepresentation or false sales pitch made by some selfcentric mutual fund agents. Thus, to make things easy for you, we provide you with a 5-step strategy to select a diversified equity mutual fund for your portfolio. 1. Compare returns across funds within the same category

One of the most basic forms of benchmarking involves comparing funds within a category. For instance, if you areevaluating a large cap for investment, you should compare its returns with other predominantly large cap diversified equity funds. Comparing it with mid cap funds for example, will deliver erroneous results, because the risk-reward relationship between mid cap and large cap funds are not comparable. As equities are best equipped to deliver returns over longer time frames (3-5 years), investments in diversified equity funds should be made with a long-term perspective. Hence, while comparing returns, investors must consider longer time frames (of 3-5 years) before taking a conclusive decision about investing in a fund. Comparing a fund over a longer time frame will also give investors a good idea about how the fund has fared over a stock market cycle (boom and bust). Performance of the fund across different market phases compared with the category average will help in gauging the consistency of the returns generated by the fund. 2. Compare returns against those of the benchmark index

Regulations demand that every fund mentions a benchmark index in its Offer Document. The benchmark index serves the dual purpose of being a guidepost for both the fund manager and the investor community. All eyes must be on the benchmark index and how the fund has fared against it. Again with a diversified equity fund, investors should consider the performance of the fund over the longer time frame, while comparing it to its benchmark index. In the Indian context, most equity funds outperform their benchmark indices over the long-term (3-5 years). However, during market turbulence, like the one witnessed over November 2010 till date, investors will find many equity funds trailing their benchmark indices. This is something we have observed on more than one occasion. The funds that can outperform their benchmark indices during stock market volatility must be marked closely.

3. Compare

against

the

fund's

own

performance

Besides comparing a fund with its peers and benchmark index, investors should evaluate its historical performance as well. Not all funds show stability in performance over the years . Many of them plunge during the market downturn, sometimes even more than their benchmarks or the category average; only a few manage to sustain their performance year after year, market cycle after market cycle. By evaluating a fund against its own historical performance, you ensure that you get the most consistent performers in your mutual fund portfolio. The inconsistent performers (the one rally wonders) are available a dime a dozen and must be filtered effectively. 4. Check the costs associated with the mutual fund scheme Apart from analysing the performance of the mutual fund scheme, you should also pay attention to the costs associated with investing in that particular scheme as this has a direct bearing on the net returns you earn from the mutual fund scheme. Expense ratio should be checked before making the final decision of investing in a mutual fund scheme. Also, beware of the exit load (charges levied by a mutual fund scheme in case of redemption within the stipulated period) while requesting for redemption from a mutual fund scheme. However, if you hold on to your investments from a long term point of view, you need not bother about the exit load whatsoever. 5. Risk-related parameters

While NAV returns are important, one area, which should never be ignored by investors is the risk undertaken by the fund to generate returns. Mutual funds being market-linked are prime candidates for stock market related risks. The two aspects that investors should take into account are volatility of the fund as indicated by the Standard Deviation (SD) and risk-adjusted returns as calculated by the Sharpe Ratio (SR). While SD shows the degree of risk taken on by the fund, SR shows the return generated by the fund per unit of risk taken. The SD (volatility) of a fund should be lower than its peers; on the other hand, the SR should be higher. The best fund is the one with the lowest SD and the highest SR within its peer group. Again, it is advisable for investors to evaluate the SD and SR of the fund on a historical basis so as to identify the most consistent performers. Hence, the next time you come across a situation where you need to select a diversified equity mutual fund for your portfolio please ensure that you undertake the 5 easy steps mentioned above.
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BankBazaar.com Planning your taxes is an integral part of your financial planning. Sec 80C of the Income Tax Act allows you to claim deductions from your taxable income by investing in certain investments. One of the most popular Sec 80C investments is in tax saving mutual funds or Equity Linked Savings Scheme (ELSS). This is an equity diversified fund and investors enjoy both the benefits of capital appreciation, as well as tax benefits. With the financial year coming to a close and sentiments towards equity markets turning positive, investments in ELSS are on the rise. Let's understand more on Equity Linked Savings Schemes.

Tax saving mutual funds: Equity Linked Savings Scheme

28 Jan, 2013 By BankBazaaTax saving mutual funds: Equity Linked Savings Scheme 28 Jan, 2013 By BankBazaar.com Planning your taxes is an integral part of your financial planning. Sec 80C of the Income Tax Act allows you to claim deductions from your taxable income by investing in certain investments. One of the most popular Sec 80C investments is in tax saving mutual funds or Equity Linked Savings Scheme (ELSS).

This is an equity diversified fund and investors enjoy both the benefits of capital appreciation, as well as tax benefits. With

thf you want to invest in equity mutual funds but are not confident about the abilities

of the fund managers, index funds are a good option for you. Index funds are equity funds that replicate a particular equity index by investing in the stocks that the index tracks. As each stock has different weightage in an index, the portfolio of an index fund is also allocated in a way to mirror that of the index. For example, if Reliance Industries has a weightage of 10% in an index, a fund based on the index would also allocate 10% of its portfolio to the stock. No fund manager risk: This strategy of building an equity fund portfolio, called passive fund management, nullifies the risk associated with a fund manager, whether it be the possibility of quitting the fund or taking wrong investment calls.
Slow but Steady

Click here to Enlarge Krishnamurthy Vijayan, managing director and CEO, IDBI Mutual Fund, says that index funds are independent of the competence of a fund manager, his longevity or his character. According to Jaya Prakash, head, products, Franklin Templeton Investments, India, index funds are ideal for investors who prefer to take only market risk and not a fund manager risk. Lesser portfolio churn: As the portfolio is based on a particular index, there is less churning of the portfolio, thus saving on the brokerage and transaction cost. Low expense ratio: With limited role of fund managers, the fund management charges are also lower in index funds as a result of which the expense ratio is lower than that of actively managed funds. The average expense ratio of actively-managed fund is 2-2.5%, while it is 1-1.5% in case of index funds. Traded on exchanges: Usually, normal funds can be bought and sold only at the net asset value (NAV) declared at the end of the day. But in case of index funds that are traded on exchanges, one can buy and sell anytime of the day at the price prevailing at that particular time. This way, one can take the price advantage not available in nonexchange-traded funds. PERFORMANCE COMPARISON Despite the above benefits, index funds lag many actively managed funds in terms of returns. In the three-year period up to March 31, 2011, the returns given by the non-sectoral

index funds are in the range of 3-12% with only two schemes - HDFC Index Sensex Plus and Nifty Junior BeES - out of the 22 funds with more than three years of existence giving double-digit returns. (See table: Top 10 Index Funds) The difference in returns from the respective index (also called tracking error) is due to fund management and trading cost, time-lag in collecting and allocating the money and holding high cash at times. If we compare this to actively managed equity funds, over 80 such funds gave over 10% annualised returns, with the highest being 23% by ICICI Prudential Discovery Institutional during the aforesaid period. 1.5% of the total asset under management is the upper cap on the annual expenses an index fund can charge from Investors.

Though during the same period, 20 actively-managed equity diversified funds also posted negative returns, no index funds posted 2.5% of the total negative returns during the period. In fact, none of the index funds asset is the upper gave negative return in the 1-year, 3-year and 5-year period to March cap on the annual 31, 2011. expenses an This shows that though the upside is lower, index funds can also limit actively managed the losses caused by the fund manager's wrong calls. Most financial fund can charge planners and mutual fund experts though believe that it would take from Investors. some time for index funds to become popular in India as there is scope in the country for actively managed funds to beat the benchmark indices consistently. "Returns from index funds are smaller compared to other diversified equity mutual funds, and investors generally avoid these funds. It has been proven that some random stocks could beat market returns," says Joseph Thomas, head, investment advisory & financial planning, Aditya Birla Money. Sumeet Vaid, founder and CEO, Ffreedom Financial Planner, says that Indian equity markets are less efficient than the developed markets in terms of uniform flow of information about particular companies and stocks. "This offers opportunity for fund managers to find stocks that can beat the benchmark indices consistently," he adds. Index funds, despite their not giving ver high returns, can be a good option for investors who want to invest in equities but are still looking to minimise the risk involved in doing so. e
financial year coming to a close and sentiments towards equity markets turning positive, investments in ELSS are on the rise. Let's understand more on Equity Linked Savings Schemes. r.com Planning your tTax saving mutual funds: Equity Linked Savings Scheme 28 Jan, 2013 By BankBazaar.com Planning your taxes is an integral part of your financial planning. Sec 80C of the Income Tax Act allows you to claim deductions from your taxable income by investing in certain investments. One of the most popular Sec 80C investments is in tax saving mutual funds or Equity Linked Savings Scheme (ELSS).

This is an equity diversified fund and investors enjoy both the benefits of capital appreciation, as well as tax benefits. With the financial year coming to a close and sentiments towards equity markets turning positive, investments in ELSS are on the rise. Let's understand more on Equity Linked Savings Schemes. axes is an integral part of your financial planning. Sec 80C of the Income Tax Act allows you to claim deductions from your taxable income by investing in certain investments. One of the most popular Sec 80C investments is in tax saving mutual funds or Equity Linked Savings Scheme (ELSS). This is an equity diversified fund and investors enjoy both the benefits of capital appreciation, as well as tax benefits. With the financial year coming to a close and sentiments towards equity markets turning positive, investments in ELSS are on the rise. Let's understand more on Equity Linked Savings Schemes. 8 Jan, 2013 By BankBazaar.com Planning your taxes is an integral part of your financial planning. Sec 80C of the Income Tax Act allows you to claim deductions from your taxable income by investing in certain investments. One of the most popular Sec 80C investments Tax saving mutual funds: Equity Linked Savings

Scheme
28 Jan, 2013 By BankBazaar.com Planning your taxes is an integral part of your financial planning. Sec 80C of the Income Tax Act allows you to claim deductions from your taxable income by investing in certain investments. One of the most popular Sec 80C investments is in tax saving mutual funds or Equity Linked Savings Scheme (ELSS). This is an equity diversified fund and investors enjoy both the benefits of capital appreciation, as well as tax benefits. With the financial year coming to a close and sentiments towards equity markets turning positive, investments in ELSS are on the rise. Let's understand more on Equity Linked Savings Schemes. is in tax saving mutual funds or Equity Linked Savings Scheme (ELSS). This is an equity diversified fund and investors enjoy both the benefits of capital appreciation, as well as tax benefits. With the financial year coming to a close and sentiments towards equity markets turning positive, investments in ELSS are on the rise. Let's understand more on Equity Linked Savings Schemes.