You see mutual fund advertisements everywhere. It showcases that it is fairly easy to invest and earn a lot just from that. However, every mutual fund varies. You cannot just go about investing in the first mutual fund you come across.
Yes, they are managed by experts. Yet, many people lose money and that should tell you that it is not without risks. Everything comes down to the mutual fund you invest in. The strategies, objectives, risk-reward ratios, and many such factors are at play.
Broadly speaking, we can categorize the factors that influence the mutual fund’s success into three categories. They are:
- Quantitative Factors
- Qualitative Factors
- Personal Factors
These are also the tools that help you figure out the investment worthiness of a mutual fund. In this blog, we will discuss the 7 easy quantitative tools to select the best mutual fund.
Studying past performances can help you set realistic goals with your investment. You should not use this data to assume that the equity will perform well in the future as well. This is just another tool to understand the asset. There are quite a few ways to determine the past performance of a fund. They are as follows.
- Compare the performance of the mutual fund with other similar assets. If the asset consistently beats its competitors, then it is worth checking out.
- See if they perform well against benchmark returns. Choose the mutual fund that regularly outperforms the benchmark value.
- Analyze the performance of the asset in both bull and bear markets. Find one that doesn’t entirely sink during a bear market and keeps your investments free from losses.
Mutual funds are in essence stocks and other securities. Hence, it is important to analyze the underlying portfolio and check whether they generate good returns. You can determine the quality of the portfolio using some numbers. They are:
- Portfolio Concentration: This value shows the percentage of funds used for investing in a certain asset.
- Portfolio Turnover Ratio: This shows the number of times your fund manager buys and sells stocks. The higher the number, the more your expense on transaction costs.
Using these numbers, one can determine the quality of the portfolio. When you opt for an agency to invest in, there are several fund managers handling your account. Instead, try to hire a freelancer who will manage all your funds and make careful investments. Besides, you also get to do it at affordable charge rates.
Costs of Investment
For investing in a mutual fund, you will have some money set apart. But, to manage those funds, you will need to pay extra money. These can help you understand if investing in the said fund is truly worth it. You can classify these costs into two categories. They are:
- Expense Ratio: The price it takes to pay the fund manager, administrative costs, overheads, legal costs, and other additional costs that go into managing the mutual fund.
- Exit Loads: This is the cost incurred for premature exit from the fund. This can lead to you paying a percentage of the fund invested as the exit load.
After analyzing these values, you must determine whether your investment will be worth it. You can get to know about all these technical details once you choose your provider.
Yes! You will be paying taxes for the investments made. So, it is important to assess the taxes you will pay for the mutual fund you select. Going through a mutual fund company benefits you in this area. They will help you understand every aspect of your investment, along with the tax charges for various situations like selling before the fixed time frame, getting long-term capital gains, etc.
Assets Under Management
This indicates the size of the respective fund you have decided to invest in. The popularity of the asset in the market is what drives its size. However, not all popular funds make big in the market. The fund manager may not be able to analyze all the factors involved on time to generate a profitable return.
So, the larger size of the fund may not always be beneficial. By assessing the percentage of AUM that is actually performing in the market, you can understand the quality of the asset you want to invest in.
This is one of the most popular ways to select the best mutual fund. It is a great tool for calculating risk-adjusted returns. This ratio is basically a comparison between the risk associated and the returns gained. The value is helpful in understanding and prioritizing funds within your portfolio. All you have to know is that the higher the Sharpe ratio, the better it is for your risk-adjusted returns.
After you ascertain all the other aspects of the asset, you should know the volatility/risk of the fund. This should be one of your major deciding factors. Based on the historical performance, this tool calculates how much the actual returns deviated from the expected returns.
Assessing this value will let you understand the asset in-depth and adjust your funds according to the risk associated.
Every kind of investment carries risks of all sizes. As such, mutual fund investments are not an exception. Most prefer it due to the security they get in comparison with owning individual stocks. Thus, when you find the right fund manager, mutual funds can become a highly lucrative income for you. So, be sure to make well-informed choices based on data and not on gut feeling.