What is Equity Mutual Funds? How to choose best Mutual Funds?

The trend of investing in mutual funds is increasing among the investors of the country. Equity mutual funds have emerged as the first choice of retail investors. However, most of the investors still do not know how to choose the right equity fund. This is what we are going to tell you. 

Mutual funds are right, it's a fact, but a 'factsheet' will help you solve the puzzle of choosing the right fund. Factsheets are available on every fund house's website, which contain simple tools to measure a fund on each scale. Although there are many parameters to decide which fund is suitable for which investor, but some of them can be confusing. Often we focus only on 'returns' rather than all aspects of the fund. This is the biggest mistake, because other factors also play an important role in deciding whether a fund is right for investment or not.

AMFI and SEBI have clarified the rules regarding factsheets. Because of this, the format of factsheets of all mutual fund companies (irrespective of their type) remains the same. These documents are updated every month to shed light on the finer aspects of the fund. These include things like volatility, stability, level of risk and portfolio turnover ratio of the fund. Overall, the fund factsheet helps an investor to decide which mutual fund scheme best suits his financial goals. Keep in mind that every investor invests with a different objective, so no scheme can be good or bad for everyone. An investor may want higher returns in a shorter period of time by taking on more risk. It is also possible that one would like stability in returns. Obviously, every investment has its scale. Regular review of factsheets also helps the investor to know how the investment is being managed and the strategy of the fund manager. Isn't he taking too much risk?

Check Out These 7 Facts In The Factsheet Of Equity Funds

Objective of Investment

It is at the beginning of the factsheet. It clearly outlines the goals of the scheme. It tells how much return the fund manager is aiming to deliver over a period of time. It also has a riskometer which shows the level of risk in the scheme. Based on these, you can decide whether the scheme suits your needs and goals or not.


Standard Deviation

Investors prefer stability in returns. In this context, the standard deviation (SD) becomes an important parameter. The SD gives an idea of ​​how much volatility is possible in the returns of the fund. If the average return of a fund is 15% and the SD is 5%, the returns can fluctuate by 10-20%. The higher the SD, the greater the volatility of the returns.


Beta Value

Another standard for measuring volatility of returns is beta. It gives the volatility of the fund as compared to the benchmark index. A beta value greater than 1 means that the scheme is more volatile than the benchmark. Conversely, if it is less than 1, it indicates that it is more stable than the benchmark. This is considered a very good condition.


Sharpe Ratio

If you have to choose between two funds that offer similar returns, Sharpe Ratio can make that decision easy. It compares the performance of the fund with the risk taken by its managers. As such, this scale represents the risk-adjusted return. While it is good to have low SD and Beta, high Sharpe Ratio is considered better.


Returns Compared to its Benchmark

Each factsheet shows the historical returns of the scheme as compared to its benchmark. Although past performance is not a guarantee of future returns, it does give an idea of ​​the number of times a scheme has performed better or lower than the benchmark. The return of a scheme over the benchmark is called 'alpha', which is higher, the better.


Portfolio Turnover Ratio

Portfolio - Turnover Ratio (PTR) shows the stability of the portfolio based on the holding percentage of the fund. Funds that are managed aggressively have higher PTR than those that prefer buy-and-hold strategy. A fund with low/medium PTR is preferable as it indicates strong research.


Portfolio Structure

The factsheet contains the structure of the portfolio of the scheme. This will help in understanding the investment and cash balance in equity schemes. It also mentions segment and company wise asset allocation. From this it will be understood whether the scheme is running according to the target or not. What should be kept in mind in the fact sheet of Debt Fund, read in the next issuer.

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