Three mantras to help you pick the best funds

A month ago, Mr Patankar (a cautious investor by habit) decided to invest Rs 3 lakh in a 'good' mutual fund.

He looked up the performance rankings of various funds, to try and zero in on the best fund. But a month later he is still confused, because there was no consistency or consensus amongst rating agencies.  

Different financial web sites, magazines and newspapers came up with different conclusions as to the top rated funds. 

This is because, the rating methodology adopted differs from agency to agency.

In a bid to prove that they are special and more incisive than the next agency, they adopt all kinds of techniques and statistical tools to come up with dissimilar results. Why rankings differ?

• Most agencies adopt risk adjusted ratings, however, the definition of risk differs from agency to agency.
• Some adopt the Sharpe ratio, some use the Sortino ratio and yet others look at standard deviation and beta.
• Then there are others who choose particular parameters like size of assets, portfolio turnover, tenure of the fund manager with the fund, fund size, expense ratio then proceed to assign weights to each of these parameters to arrive at a composite ranking.
• Others declare that they use a proprietary system which remains unknown to the public at large.

So, how do you pick the best fund?

Here are three simple steps to sort out the good from the bad. 1.  View rankings with a pinch of salt Most of these arcane rating methodologies are solutions in search of problems.

Don