Life is often a journey where we always want the best. The best school, the best college, the best job, the best car. We are always competing with one another for the top position. This explains why most of us tend to look for the best mutual fund schemes when making investments.
Nonetheless, there are approximately 47 AMCs or asset management companies offering several schemes, so how do you choose the right scheme? Do you follow the rankings, or is there a better approach? Or is the concept of the “No. 1” fund a myth?
Let us find out.
“No. 1” mutual fund: A myth?
Before making an investment in any mutual fund, you might look at its past performance, rankings, and the ability to outshine other funds in that particular category.
Mutual fund performance is based on the research / fund management process followed by the AMC and market dynamics.
Thus, it is possible that a mutual fund that tops the charts in a particular period may fall behind in the next period due to shifting market dynamics. For instance, a fund heavily invested in pharma stocks may excel during a pharma boom but may struggle during a sector downturn.
Looking at only the “No.1 fund” might not be enough as today’s leader may not retain its status in the future. Therefore, the idea of a “best” mutual fund is a myth. There is also a disclaimer in mutual funds, “The past performance of is not necessarily indicative of the future performance.”
Hence, “CONSISTENCY” in mutual fund performance can be your key.
Aim for consistency
One element that is important in choosing mutual funds is consistency of providing risk adjusted returns over time.
Mutual fund schemes that usually perform well in different market scenarios which has :
Good professional management,
A disciplined research and investment process and
Disciplined approach towards the risk management
This consistency is vital since investing is not only about picking the star performer but rather about consistent risk adjusted returns that help achieve your financial goals.
To check for consistency, you can also check the:
Rolling returns of a mutual fund scheme. This metric assesses a fund’s performance over different time frames, providing insight into how it has performed in various market conditions.
Sharpe ratio is yet another metric that you can utilise. This ratio measures risk-adjusted returns, offering an understanding of how well the fund compensates for its risk exposure.
Other considerations for mutual fund selection
To find the right mutual fund for yourself, considering other factors beyond performance is also crucial.
1. Consider risk tolerance and investing goals
A mutual fund’s popularity does not guarantee it is the right choice for you. Your risk tolerance must be taken into consideration, along with your investing goals, to find a suitable fund.
Ask yourself these questions before deciding:
What are your investing goals? Short-term or long-term?
How long do you intend to invest?
Acceptable levels of risk?
Finding answers to these questions can help you choose a suitable fund.
2. Expense ratio
One of the other essential aspects that you can focus on is the fund’s expense ratio - it is the percentage of a fund’s assets used to cover expenses, like administration, management, marketing, and distribution. The high expense ratio lower the returns of mutual funds. Consider low expense ratio mutual fund while investing.
3. Fund House’s investing style and track record
The track record and investment style of a fund house are critical factors. Set processes with a good returns potential and a well defined, disciplined approach to investing is likely to be more dependable.
Final thoughts
In the quest for mutual fund investments, it is essential to note that there is no universally recommended right fund. Focus on identifying funds that demonstrate consistent, long-term performance and align with your financial goals.
Understand the key factors that can influence fund performance and prioritise consistency. That way, you can make investment decisions that can stand the test of time.
Embrace a strategy that values steady growth and reliability!
