- Agents compare mutual funds to understand their performance and give investors the right choice for investment.
- Knowing the right set of questions and checkpoints can ensure that you get accurate outcomes.
- The best mutual fund for any investor is based on risk appetite, return expectations, and financial goals set.
- Checking the returns over time and knowing the charges is just the starts and you would need to reevaluate the portfolio with time.
- No mutual fund is 100% safe and this is one of the primary considerations agents should keep in midn when comparing funds.
The main points to consider when you compare mutual funds include their structure, returns, risk, exit load, and the history that defines the potential investors of the fund. At the same time, you should also check the details of the fund managers and how well the manager has worked in the past. But as an agent, you should have a complete checklist with you that can save time.
So, read this guide to know the checklist of the points that you should keep with you when you are comparing mutual funds. This should be used when you are pitching to the client or even when you are just checking for the information.
Checklist to Compare Mutual Funds by Agents: A Snapshot
Using a simple yes and no or binary framework can help you check the performance of the mutual funds better. Here is a quick snapshot of things that you should check.
| Checkpoint | Fund A | Fund B | Note |
|---|---|---|---|
| Fund performance in the past 5 years compared to the category average | Outperformed / Underperformed | Outperformed / Underperformed | Compare 1-year, 3-year, and 5-year returns with the category average. |
| Alpha compared to a direct peer | Higher / Lower | Higher / Lower | Compare the alpha of both funds. A higher positive alpha indicates better risk-adjusted performance. |
| Expense ratio for the same plan type | Higher / Lower | Higher / Lower | Compare the TER of the same plan type, such as Direct-Growth with Direct-Growth. |
| Fund manager tenure | ___ years | ___ years | Check whether the fund manager has managed the scheme continuously for more than 3 years. |
| Concentration of top 10 holdings | ___% | ___% | Check what percentage of the portfolio is held in the top 10 holdings. Lower concentration may indicate better diversification. |
| Downside capture ratio against the benchmark | ___% | ___% | Compare how much each fund falls when its benchmark declines. A lower ratio generally indicates better downside protection. |
Now that you have this basic checklist with you, lets us find the explanation of the same here.
1. Evaluate Fund Performance Metrics
By checking the past performance of the fund, you can understand if the fund has performed consistently or worked well in some seasonal cycles only. You should consider multiple investing cycles here rather than using just one timeline. Here is what you should do:
- Check for the rolling returns over multiple years, where you can overlap some time as well. It can be 3 or 5 years continuous, which can be good.
- Compare against the benchmarks like the Nifty 50 or Nifty 500 to see how the fund worked against these returns.
- Look at the peers in the same category and compare their returns with the returns of the fund under consideration.
- Check the performance of the fund manager who was managing the fund and see how the manager has worked and delivered in the past.
2. Focus on the Key Risk Adjusted Ratios
Dont think high returns with high risk are good. If the fund manager is taking risky decisions which are not backed by the technical indicators, you can see some fall in the future or even in the past. Here is what you should check:
- Check Alphs to know the excess return that the fund is generating as compared to the benchmark.
- Consider beta to see how the volatility is working in terms of the market.
- Find the Sharpe Ratio to know the excess return your client can get when there is extra volatility.
- Standard Deviation should also be considered to find the historical averages of the returns.
- Lastly, find the Sortino Ratio to find a clear picture of how volatility has penalised the return, positive or negative.
| Metric | If This, Good | If This, Bad |
|---|---|---|
| Alpha | Above 0 | Below 0 |
| Beta | Below 1 | Above 1 |
| Sharpe Ratio | Above 1 | Below 1 |
| Standard Deviation | Lower than peers | Higher than peers |
| Sortino Ratio | Above 1 | Below 1 |
3. Rework on Cost and Fund Structure
Every mutual fund has some fees and charges associated with it. The higher the fee is, the more your customer would need to pay, which will impact the compounding over time. Hence, you should actually compare and understand the implications of the same as well to see which fund stands better. The points to analyse are:
- Understand the exit load and see if the fund applies the same if your client wishes to withdraw early.
- See what the expense ratio is, as this is a fee that is reduced from your entire amount towards management.
- Analyse the portfolio turnover ratio to know the frequent and speed of selling stocks in the market that are in the fund by the manager.
- Check on the AUM and know how well it is growing over time, or whether it is staying stagnant.
| Metric | If This, Good | If This, Bad |
|---|---|---|
| Exit Load | Lower / None | Higher |
| Expense Ratio | Lower than peers | Higher than peers |
| Portfolio Turnover Ratio | Lower / Moderate | Very high |
| AUM | Stable growth over time | Falling consistently |
4. Check the Portfolio Quality and Style
Every portfolio is different, and also the investment style. As an adnet, you would need to check the quality and style for each to see which stands in a better position and how. Here is what you can check:
- Look for the asset allocation and how the money is invested in stocks, bonds, debts, or any other asset.
- See if there is a high concentration risk for any specific sector or not. Anything like 5-10% can be considered high.
- Look if there is any sectoral indexing more in one area, like banking, technology, or others.
- Always check the credit rating of the debt and see if it is AAA, AA, or even lower.
Which Mutual Fund is Very Good?
There is no absolute very good mutual fund because the choice will be based on the risk appetite of your client. But if you come across this question, you should focus on comparing the options based on the checklist that has been shared here. Consider the goals of the investors as well when you are actually finalising a fund or options to compare.
To ensure that you find a good answer, here is a simple table that you can use for quick analysis:
| Check | Good Fit If | Avoid / Reconsider If |
|---|---|---|
| Investment Goal | Fund matches the client’s goal | Fund does not match the goal |
| Risk Appetite | Risk level suits the client | Risk is higher than client can handle |
| Investment Period | Fund suits the planned time horizon | Client may need money earlier |
| Return Expectation | Expectations are realistic | Client expects guaranteed/high returns |
| Fund Performance | Consistent against peers/benchmark | Consistently underperforms |
| Cost | Expense ratio is competitive | Costs are high compared with peers |
| Liquidity | Withdrawal terms suit the client | Exit load or restrictions are unsuitable |
Is Mutual Fund 100% Safe?
Now, a mutual fund is not 100% safe, as the fund invests in the market, so there is an inherent risk involved. Unlike the FD, which has a fixed rate of return, a mutual fund offers you varied returns based on the market, and this means it can be low, negative, or even high at times.
The two major risks that you should know as an advisor over here are:
- Market Risk: This is associated with the equity, and the risk is like a fall in the market or fluctuations that can impact your returns.
- Credit or Interest Rate Risk: This is associated with the debt or bonds where you get a fixed return, but any change can impact the returns of the fund.
Conclusion
As a mutual fund advisor, you would need to compare and contrast the options for your client a lot. The idea is not just to give them some report but to help them evaluate the options and land on one which is actually right for them. This is where you would need access to the tools and calculators as well.
Choice Connect is one such platform that offers you a complete set of tools that can help you with the analysis and support in the comparison better. So, join us today and start your earning journey today.
FAQs
1. Is the Groww App 100% Safe?
No investment app can be considered 100% risk-free. Groww is a SEBI-registered stockbroker. However, mutual fund investments made through the platform are still subject to market risks.
2. How to Invest ₹5,000 Per Month in a Mutual Fund?
You can invest ₹5,000 monthly through a Systematic Investment Plan (SIP). Select a suitable mutual fund, complete your KYC, choose ₹5,000 as the SIP amount, and set a monthly investment date.
3. What Are the 7 Types of Mutual Funds?
Common types include equity, debt, hybrid, solution-oriented, index, sectoral or thematic, and money market or liquid funds. Mutual funds can also be classified differently based on structure and investment objective.
4. What Are the Five Categories of Mutual Funds?
Five broad categories are equity funds, debt funds, hybrid funds, solution-oriented funds, and other schemes such as index funds and ETFs. Each category serves different investment goals and risk levels.
5. Which Mutual Fund App Is Better?
There is no single best mutual fund app for everyone. Compare apps based on ease of use, available schemes, direct plan access, charges, research tools, customer support, and the features you actually need.
