Before buying funds, know what they own
Investing in mutual funds for most of us is like buying a dress that is in trend now and looks good from outside. Nevertheless, buying a mutual fund should be more like a home, which should not only look good from outside but from inside too. Hence, before buying your house you walk through it and check the house from inside for a leaky roof, cracks in the foundation or any other fault. Likewise, investing in MF schemes requires you to know the reasons for a fund's performance and if it is going to repeat it going ahead. To know this you need to know what is there in its portfolio and how it invests. This will help you to decide if you should invest in it. Knowing what a fund owns helps you understand its past behaviour, set realistic expectations for what it might do in the future, and figure out how it will work with the other investments you might own.
Checking Sector Weightage
Some of the discerning investors check the nature of the fund if it is growth or value-oriented and select them if it suits them. Though it will help them a lot, it will not be enough. This is because funds with similar style also can exhibit different returns character. This is because of their different sector weightage. For example, a fund with higher weightage in NBFCs would have generated better returns in the year 2017 compared to a different growth fund that had major weightage in Pharmaceutical stocks. Hence, if funds in your portfolio are heavily tilted their holdings in a certain super-sector, it can be a strong indication that your portfolio needs exposure to other parts of the economy.
Examining Number of Holding
Knowing the number of stocks a fund holds is as important as checking its weightage. It will help you to know the return behaviour of the fund. For example, a fund that is holding 30 stocks is likely to be more volatile than the fund with a higher number of stocks.
Checking the turnover ratio
In addition to checking a fund’s sector weightage and a number of holdings, a fund’s turnover rate is another important factor when you’re judging a fund. Turnover ratio, which funds disclose in their fact sheet to shareholders, measure how much the portfolio has changed during the past year and shows approximately how long a manager typically holds a stock. For example, a fund with a turnover rate of 100 per cent has a typical holding period of one year; a fund with 50 per cent turnover holds a stock for two years on average. The turnover ratio helps you to understand the behaviour of the fund manager in terms of his attitude towards risk-taking. A higher ratio means he is aggressive, while a fund manager who believes in taking lower risk has a lower turnover ratio.