Don't Pick the Wrong Mutual Fund! Follow These 6 Simple Steps Before You Invest

Suppose you want to buy the new iPhone 16. It's expensive, so you decide to look for the best deal. First, you check Amazon, Flipkart, and Vijay Sales. All of them show different prices. Then you visit a few local stores to compare. You look at discounts, offers, bank deals basically everything to save even a few thousand rupees. Finally, you buy from the place where you get the best deal.

Now think about this if we are so careful while buying a phone, shouldn’t we be even more careful when investing our hard earned money?

The same logic applies when you are choosing between two mutual fund schemes, especially from the same category for example Flexi Cap. Just like every seller gives a different price for the same phone, every fund performs differently, even though both may invest in similar companies. So, how do you decide which one is better?

Step 1: Check the basic details of the fund

Before comparing two Flexi Cap mutual funds, suppose 'X' and 'Y' fund, you should first check some basic information.
 

Expense Ratio: Fund company charges this for handling your money. Lower means better.

Exit Load: If you withdraw money early, this is the penalty. Always check how much and till when.

Lock-in Period: Some funds don’t allow you to take out money for a fixed time. Check if there is any lock-in.

Inception Date: Shows how old the fund is. Older funds have more history to check performance.

Minimum Investment: This is the least amount you need to start investing in the fund.

Benchmark: This is what the fund tries to beat. Compare returns with this to know if the fund is doing well.

Fund Manager & Track Record: Person who manages your money. See their experience and past performance.



Step 2: Check the return performance (%)
 

After seeing the basic details, the next thing to check is how much return the fund has given in the past. This helps you know how the fund has performed over different time periods.

Look at the fund returns for these time frames:

6 Months: Shows recent performance in short term.

1 Year: Tells you how the fund did in the last 1 year.

3 Years: Good to check medium-term performance.

5 Years: Shows how stable the fund has been over time.

10 Years : If available, tells you long-term performance and consistency.

Step 3: Check important mutual fund ratios

These numbers tell you how risky the fund is and how well it is giving returns compared to that risk. It’s not tough.

1. Standard Deviation (SD): This shows how much the fund's returns go up and down.

If SD is high, the returns keep changing a lot. Means more risk.

Formula: SD = square root of average of squared difference from average return

2. Beta: This tells how much the fund moves compared to the market.

If beta is 1, fund moves same like market. More than 1 means more risky, less than 1 means safer.

Formula: Beta = (Covariance of fund and market) ÷ (Variance of market)

3. Sharpe Ratio: This shows how much return you are getting for the risk taken.

Higher the number, better the fund is managing risk.

Formula: (Fund return – Risk free return) ÷ Standard deviation

4. Sortino Ratio: Similar to Sharpe, but only looks at downside risk, not all risk.

Higher Sortino means fund handles bad times better.

Formula: (Fund return – Risk free return) ÷ Downside deviation

5. Alpha: This shows how much extra return the fund gave compared to what was expected.

Positive alpha means fund did better than market.

Formula: Alpha = Actual return – Expected return (based on beta)

Step 4: Check where the fund is investing (allocation)
 

Now see where the fund is putting your money. First, check the average market cap of the fund. This tells if the fund is investing more in big companies or small ones. Then look at how much is going into large cap, mid cap, and small cap stocks. Some Flexi Cap funds may invest more in large caps for safety, while others may take more risk with mid and small caps. Also check how much cash the fund is holding. If a fund is keeping too much cash, it means money is not fully invested.

Step 5: Check which companies the fund is holding
 

Every mutual fund shows a list of stocks it is investing in. This is called portfolio holding. You should always check which companies the fund is holding more money in. This helps you understand if the fund is investing in good quality stocks or not. Also see if the stocks are from different sectors or all from one or two sectors only.


 

Step 6: Check NAV performance

NAV means the price of one unit of the mutual fund. It goes up or down based on how the fund's investments perform. By checking how the NAV has moved over time, you can understand if the fund has grown well or not. Don’t just look at the current NAV, but also see how much it has increased in the last 1 year, 3 years, or 5 years. This will give you a clear idea about the fund’s overall growth.

Conclusion

Choosing between two mutual funds is not about guessing or going by just name. It’s about checking all the important things like returns, risk, where the fund is investing, and who is managing your money. Just like you compare everything before buying a phone, take the same care while picking the right mutual fund.

All screenshots are taken from the Rupeevest website.