Factors to look out for while evaluating mutual funds

Mandar Wagh
/ Categories: Knowledge, Fundamental
Factors to look out for while evaluating mutual funds

Investing in a mutual fund is a process that requires some basic knowledge as well as market awareness. An investor either invests with the help of an intermediary or may conduct research in order to invest on his own. That is where the importance of ‘evaluation of mutual fund’ comes into the picture!

Generally, investors who have a higher risk appetite choose equity over debt. On the other hand, those who expect a regular/fixed income while securing their capital prefer to invest in a Debt Fund. It is the most important step in the selection of a mutual fund. There are various financial ratios such as alpha, beta, Sharpe ratio, etc. However, in order to evaluate the performance of a mutual fund as well as the factors affecting it, an investor should keep his eye on the following factors -  

1.      The reputation of the fund house and fund manager -  

An investor should examine the previous record of the fund house and fund manager as the effectiveness of the performance of the fund manager can make or even break your investment.  An investor should check whether the fund manager keeps a record of his prior investors’ buying & selling, find out new opportunities, and handle portfolios in various kinds of market cycles, or not.  


2.      Assets under management – 

An asset under management (AUM) is the total market value of all the assets or funds such as cash, bonds, equities, and real estate that a mutual fund house manages at a given point in time. AUM includes returns as well as initial capital that a fund manager has to invest. It is an indicator of the size and success of a fund house. Large-cap and mid-cap funds may handle a large AUM. On the contrary, small-cap funds desire a low AUM.  


3.      Portfolio turnover ratio –  

In simple words, it is a measure that states how frequently assets are bought and sold by the fund managers. It is calculated by taking the total amount of newly-bought securities or securities sold (whichever is low) over a specific period, divided by the total net asset value of the fund. Actively managed funds have a higher turnover ratio as the fund manager is not required to be dependent on the investor’s decision. A ratio between 20-30 per cent is considered to be lower whereas more than 50 per cent is said to be a higher turnover ratio. Index funds and ETFs have low turnover ratios.  


4.      Expense ratio –  

Buyers of mutual funds must know what amount they are paying for managing their funds. It is the total percentage of funds used as operating expenses such as administrative, advertising, and others. An expense ratio of 1 per cent means each year, one per cent of the fund’s total assets are used to cover these expenses. Expense ratios have declined over the last few years but it is advisable to select a fund house that will charge less in terms of expense ratio.  


5.      Exit load –  

Exit load is a fee charged by the mutual fund house to allow an investor to exit a scheme partially or fully within a specific time period from the date of investment whereas, an open-end scheme can be redeemed at any point in time. Currently, many fund houses charge exit load between 1-2 per cent.  

The above parameters can help you in selecting and evaluating the mutual fund, in which, you wish to invest your funds. Once you have selected the best suitable fund for you, you must track its performance regularly in order to protect and strengthen your fund.  

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