How to compare mutual funds the smart way

It’s time to listen if you’re going with inky pinky ponky when it comes to choosing mutual funds. There are no shortage of funds in the market clamouring for your attention. It can be intimidating. But choosing a mutual fund isn’t so difficult once you know all the rules. So let’s check out how to compare mutual funds to get the best deal.

Track Returns

The first filter is to track the returns to gauge which ones are better than the others. Returns are the easiest to measure and compare across funds. A fund’s return is simply the difference between its starting Net Asset Value and its ending Net Asset Value over a specified period. Nevertheless, checking the returns of mutual funds is not the only way to compare them. Returns help you see how they compare on a broad scale.

Check for Absolute Returns

Measuring a fund’s performance can be done by noting the NAV on one day and re-checking it at a certain point in time later. Whether it be six months, twelve months or more, the percentage difference will give you the return over this period. However, to accurately compare mutual funds, do ensure that you’re taking into consideration like for like – after all apples should not be compared with oranges! Therefore, when evaluating diversified equity funds for instance, make sure that you only compare against other diversified equity funds.

Set a Returns Benchmark

The Securities and Exchange Board of India requires mutual funds to announce a benchmark index. This is the target that the fund attempts to meet and when it exceeds this benchmark, it’s deemed as an outstanding performance. By comparing the fund’s returns with its particular benchmark index, investors can ascertain if they have made a good investment. For instance, if you invest in a diversified equity fund which has a Sensex benchmark index, its performance will be compared against that of the Sensex.

Track the Time Period

It is very important to compare mutual funds over the same period for which they are intended. For equity funds, the period over which returns should be compared and evaluated must be the same period in which the fund type is supposed to be invested. If you are comparing equity funds, you should compare them over a period of three to five years. Cash funds are ultra-short-term bond funds or liquid funds that invest in fixed-return instruments with short maturities. You can therefore compare these funds on the basis of their six month returns.

Market conditions is crucial

It’s vital to assess the return history of a fund in order to determine whether it has been tested in various market contexts. For example, equity funds released just a few years ago can seem quite successful; however, they may not have experienced a bearish or declining market yet. Consequently, it’s advisable not to compare returns between such funds and those that have had to withstand difficult conditions. If yours holds up against a benchmark during bear markets, you know your fund manager is doing their job properly.

Things you must keep in mind while comparing mutual funds

• Checking for returns is your first step
• Compare funds that are similar
• If you compare returns, make sure that the time period is the same, or you may be looking at one fund’s one-year returns and another fund’s three-year returns.
• Don’t compare a fund with another fund’s benchmark, but with its own