Mutual funds: First time investors should look for these details while comparing the schemes

Mutual funds are a much sought after investment avenue especially by the new generation given the potential to generate high returns, particularly through the Systematic Investment Plan (SIP) route. The tech savvy youngsters tend to check and compare the performance of schemes online. Middle aged investors also have the habit of doing comparison online and a good number of them decide and invest based on these comparisons.

How effective is an online comparison of mutual funds to make investment decisions?

While online comparisons give a lot of information there are quite a number of terms which are very technical for investors to understand. Also there is some very critical information which online portals don’t or cannot convey.

Some of the information that a common investor would miss during an online research are pedigree of the fund manager, change in investment style of a scheme like growth and value, different stock picking style for various schemes of the same fund house, significant changes in the portfolio which could impact performance, reasons for the changes in the portfolio, market cap wise restrictions for the schemes, other restrictions in holdings, credit quality, etc.

Also Read: Mutual funds: How to tweak investment in hybrid schemes for a balanced portfolio?

Some of the technical terms which an investor would find online are Sharpe ratio, Beta, standard deviation, Alpha, Sortino Ratio, R-Squared etc .These technical terms indicate risk, consistency, volatility, performance etc. Without knowing these factors well you will not be able to choose a scheme which fits your risk profile.

It should be more than convincing that the above points and the technical attributes are very critical information about the funds and decisions taken without considering them will not be any less than uninformed decisions. Also it's not just at the time of investing, it's throughout the journey of the investment that this information is highly relevant, which a lay investor would be unaware of . This information miss could mean a substantial miss in the return opportunity and risk suitability.

Also Read: Mutual Funds: Monthly SIP of ₹12,000 in this value fund would have grown to ₹36 lakh in 10 years

What looks good to the eyes today, may say little about how it would look in the future

The information online portals provide on the landing pages are more about past performance , risk and the current portfolio. As the disclaimers of mutual funds read, "The past performance of the mutual funds is not necessarily indicative of future performance of the schemes". So, clearly the information which easily hits our eyes like a great past performance, have very little relevance with regards to the investment decision as your investment is for the future and long term when the past performance and the current portfolio can change completely. Also, the present portfolio which would have delivered in the recent past could have already lost steam and there is no guarantee that it would perform in the future.

Also Read: Mutual Fund SIP calculator: Want to become a crorepati before your retirement? Here is ideal SIP to amass ₹5 crore

Another important aspect is taxation. While the taxation of equity and debt is straight forward, its not straight when it comes to the taxation of hybrid funds. The taxation would vary based on the equity and debt composition of the fund which a common man would not know. The taxation is different for funds based on the equity composition up to 35%, 35 to 65% equity and more than 65% equity. Also equity means not just the long only holdings and includes the arbitrage portion.What's more tricky is even within the same category such as the multi asset category , taxation is different for schemes of different fund houses due to the stark difference in asset allocation.

These facts allude to the fact that a very shallow online view of the funds would be remotely adequate to make investment decisions in mutual funds. Regular and close watch of the portfolio, investment style, management and fund management team is extremely necessary for you to pocket the best of returns and for risk protection.

A proper decision on investing in mutual funds needs much more knowledge and information than what is commonly available and hits one's optics.

V.Krishna Dassan, Director, Dhanavruksha Financial Services Pvt. Ltd.