Blog Details
How to Compare 2 Mutual Funds?
Wed, 18 Dec 2024
4 mins

When it comes to investing in mutual funds, choosing the right scheme can be a daunting task. With numerous options available, it's essential to compare mutual fund schemes carefully to make an informed decision.
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Here are some key factors to consider when comparing mutual fund schemes:
- Always compare a mutual fund with a similar one. Eg: A large cap fund will be compared to another large cap fund.
- Evaluate the fund manager before investing in that fund.
- Assess the historical returns of the scheme, how that scheme has performed during highs and lows.
- Study various risk ratios of the fund.
- Calculate expense ratio and capital gains tax before investing to come to absolute returns.
- The fund should always have enough cash incase of major redemption requests without affecting the fund’s NAV.
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Comparing like with Like
Before comparing mutual fund schemes, ensure that you're evaluating funds with similar investment objectives, asset allocation, and risk profiles. This will help you make a more informed decision. For instance, compare a large-cap fund with another large-cap fund, Balanced Advantage Fund with another balanced advantage fund.
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Evaluating the Fund Manager
A fund manager's experience and track record play a crucial role in navigating various market cycles. Opt for funds managed by experienced fund managers with a long and proven track record.
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Assess Historical Returns
While past performance is not indicative of future results, it provides insight into how the fund has performed over time.
Consider the following types of returns:
1) Calendar returns: Returns generated by the fund across calendar.
2) Rolling returns: Returns generated by the fund over a specific period, such as 1-year, 3-year, or 5-year rolling returns.
Select funds with consistent outperformance across various time frames. -
Risk Metrics: Understanding the Fund's Risk Profile
Consider the following risk metrics when evaluating a fund:
Standard Deviation (SD): A lower SD indicates lower volatility and risk.
For example, Scheme A and Scheme B have Standard Deviation of 13.36 and 14.79, respectively. Despite this, Scheme A is recommended due to its lower standard deviation.
Beta: A lower beta indicates lower risk.
For example, Scheme A and Scheme B have Betas of 0.89 and 0.95, respectively. Scheme A is recommended because it has a lower Beta.
Sharpe Ratio: The Sharpe ratio measures a fund's excess return over the risk-free rate, relative to its volatility. A higher Sharpe ratio indicates better risk-adjusted returns.
For example Scheme A and B have Sharpe Ratio of 0.41 and 0.15 respectively. Scheme A is recommended since it has a higher sharpe ratio.
Alpha: It is a measure of a mutual fund's performance relative to its benchmark index. It represents the excess return generated by the fund over and above the return of the benchmark index.
For example, Scheme A and Scheme B have Alphas of 0.69 and -0.34, respectively. Scheme A is recommended because it has a higher Alpha.
Down Capture Ratio: It is used to evaluate a mutual fund's performance during market downturns. A lower Down Capture Ratio is generally considered desirable, as it indicates that the fund has protected investors' capital during market downturns.
For instance, Scheme A and Scheme B have Down Capture Ratios of 64.48 and 103.86, respectively. Scheme A is preferred due to its lower Down Capture Ratio.
Treynor Ratio: It's a risk-adjusted performance metric that helps evaluate a fund's return potential while considering its level of risk. A higher Treynor Ratio indicates that the fund has generated excess returns relative to its risk level.
For example: Scheme A and B have Treynor ratios of 1.81 and 0.67 respectively. Scheme A is recommended since it has a higher treynor ratio. -
Expense Ratio: The Cost of Investing
The expense ratio is the annual fee charged by the mutual fund to manage your investments. A lower expense ratio can result in higher returns for you. When comparing funds, look for those with lower expense ratios.
Example: Scheme A and B have expense ratios of 1.42 and 1.72 respectively. Scheme A is recommended since it has a lower expense ratio. -
Liquidity Ratio: A Measure of Liquidity
Liquidity ratio measures the fund's ability to meet redemption requests without significantly impacting the fund's net asset value (NAV). It is vital in case of small and micro cap funds.
Example: Scheme A and B have liquidity ratios of 1.75 and 1.95 days respectively. Scheme A is recommended since it has a lower liquidity ratio. -
Illustration
Example below is for illustration purpose only.
Consider two mutual funds, Scheme A and Scheme B. Key risk ratios and important parameters for both schemes are outlined below in the mutual fund comparison chart. Based on the analysis, Scheme A is the recommended choice.
Parameters Scheme A Scheme B Category Flexicap Flexicap AUM 66,300 Cr. 12,900 Cr. Expense Ratio 1.42 1.72 Standard Deviation (Annualised) 13.36 14.79 Beta 0.89 0.95 Sharpe Ratio 0.42 0.15 Alpha 0.69 -0.34 Down Capture Ratio 64.48 103.86 Treynor Ratio 1.81 0.67 Turnover ratio 36% 36% Liquidity ratio 1.7592 days 1.9275 days
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To wrap things up
Comparing mutual fund schemes requires careful consideration of several factors, including the fund manager's experience, historical returns, risk metrics, expense ratio, and liquidity ratio.
By evaluating these factors, you can make a more informed decision and select the best mutual fund scheme for your investment needs. Remember to always compare similar funds and consider your individual financial goals and risk tolerance before investing.
If you need any further assistance you may reach out to us at 8047593769 or open your account, and we can help you start your investment journey.
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