Parameters for Selecting Mutual Funds
Investing in mutual funds can be a great way to grow your wealth over time, but with so many options available, it can be difficult to know which funds are right for you. In this article, we'll discuss some key parameters that investors should consider when selecting mutual funds.
One of the most important parameters to look at while selecting mutual funds is their performance history. This includes both short-term and long-term returns. It's crucial to analyze how the fund has performed during different market conditions like bull or bear phase and also compared against peers & benchmark index.
Another parameter to consider is the expense ratio of the fund. This refers to the fees charged by the fund manager or company managing the scheme as a percentage of assets under management (AUM). Lower expenses mean higher returns will remain in investor’s pocket.
Different types of schemes have varying levels of risk depending on their investment strategy and asset allocation mix . Investors need assess individual risk-taking capacity before investing into any scheme. While equity-based schemes have higher potential for growth they also come with high associated risks whereas debt schemes offer lower potential gains but are less risky.
The experience level of a fund manager plays an important role in how well a mutual fund performs. Experienced managers understand market dynamics better than novice ones resulting in more consistent performance across cycles.
Some mutual funds follow specific themes such as ESG (Environmental Social Governance) focused investments or Shariah Compliant investments which could align with personal values ensuring these social filters ensure alignment between investor beliefs and portfolio holdings.
1.Sharpe Ratio: It measures risk-adjusted return generated from investment - Higher Sharpe ratio indicates better returns relative per unit risk taken
2.Alpha: Alpha measures outperformance/under-performance compared against benchmark index , higher the alpha better performance
3.Standard Deviation: It measures how much a fund’s return deviates from average / mean returns over a period of time.
4.Beta: Beta measures sensitivity of scheme to overall market volatility, if beta is 1 it means the fund has same level of risk as compared to benchmark.
5.PE Ratio: Price-to-earnings (PE) ratio indicates valuation metrics for equity-based schemes - lower PE suggests undervaluation relative to earnings per share (EPS)
Fund size refers to the total amount of assets under management within a mutual fund. While larger funds may offer stability and liquidity, they may also have difficulty in generating returns due to size constraint and liquidity issues whereas smaller funds may carry high risk.
there are multiple factors that must be considered when choosing among various options available:
It's essential not only rely on past performance alone since past performance doesn't guarantee future returns. A well-diversified portfolio across multiple mutual fund schemes and asset classes based on investor’s risk profile would be ideal for long-term wealth creation.
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