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Five things to check while comparing mutual funds
You should always understand the parameters through which you can compare and filter mutual funds out of the large universe of offerings.
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Investors find it a bit difficult when it comes to comparing a scheme with another one. Veteran investors have also accepted that mistakes do happen many times while selecting funds for making investments. However, one always learns from past mistakes. Let us understand the parameters through which one can compare and filter and pick the right mutual funds out of the financial universe:
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Review fund managers skills | First, evaluate the past performance of the fund manager with their respective benchmarks and check if they have performed fairly. Next, having done with the evaluation of the fund manager, check what is the broader investment style of the scheme.
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Understand the fund’s investment objectives | It is important to look into the funds’ investment style (Growth, blended or value) as every fund has its unique identity. Some of the strategies are:- a) Value investing b) Growth strategy c) Blended strategy
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Compare returns in a right way | You should try and watch the past performance of the fund. It is an important factor in analysing a mutual fund. But past performance is not everything, as it may or may not be sustained in the future and therefore, it should not be used as the only parameter to select a mutual fund.
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Four risk parameters to check between funds | a) Standard deviation - that measures the volatility of the returns from a mutual fund scheme over a particular period. b) Sharpe ratio- that measures how well the fund has performed vis-a-vis the risk is taken by it. c) Alpha - the excess return of a fund compared to its benchmark index. d) Beta - measures a fund's volatility compared to that of a benchmark.
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Check for rankings | There are various agencies which provide rankings to schemes by analysing several other parameters including the ones discussed above. These ratings/rankings are given to scheme after doing intense research work.
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