HOW TO READ VARIOUS MUTUAL FUND RATIO IN SELECTING A FUND

 

Mutual funds offer a convenient way to invest in a diversified portfolio of stocks and other classes of assets. When an investor decide to invest in mutual fund he or she  must analyse parameters of not only performance but also risk – adjusted ratios, expense ratio, down side risk or Sortino ratio. The basic objective of investment is to maximize return and minimize risk, to understand this basic objective an investor should take an informed decision and built a successful investment strategy.

Things to be remember when an investor going to select a particular mutual fund. Although Performance history is primary consideration; look consistent performance over several years, particularly during different market cycle. It is important to compare the fund’s returns with its benchmark index to gauge the alpha the fund manager can generate. Emphasize the important of long-term performance over short – term gains. Fees and expenses also play a significant role. Understand the different types of costs and load fees, as lower fees generally lead to higher returns. Risk assessment involves examining the fund’s volatility and standard deviation, with beta being a useful measure of a fund’s volatility relative to the market. A beta greater than 1 indicates higher volatility than the market. The Sharpe ratio measures a fund’s risk-adjusted returns and shows how much risk a fund manager takes to deliver a return. A higher sharp ratio means a fund manager is able to deliver better risk-adjusted return. But compare these ratios with other funds in the same category to ensure the comparison is like –to-like. With all this things an investor should also consider fund managers experience and his background as because ultimately he is the person who deals with your money.

There is also another thing that an investor should take into account risk factor associated with it and how to mitigate such risk. An investor should diversify their portfolio by investing in multiple funds across various asset classes and consider geographical and sector diversification. The information ratio, recently introduced by the SEBI assesses a fund’s performance relative to a benchmark while considering the consistency of that performance, with higher ratio suggesting consistent outperformance. The sortino ratio A variation of Sharpe Ratio that focuses on downside risk, making it useful for conservative investors.