New Delhi (India), April 24: Relying solely on past returns to choose equity mutual funds can be misleading and potentially hazardous for your investment health.
To navigate the complexities of the financial markets and make more informed decisions, investors should delve into other crucial factors.
Here's a guide to five essential aspects you should evaluate before selecting an equity fund:
Risks: Risk is simply the risk of loss or the volatility of the fund. Risk of loss can be assessed by something called ‘Maximum Drawdown.' Volatility, on the other hand, can be assessed by something called ‘Standard Deviation. 'It is important to understand risks in comparison with the risk of an appropriate benchmark index or the scheme's peers.
Risk-Adjusted Returns: Beyond raw performance, it's important to understand how much risk a fund took to achieve its returns.
Metrics like the Sharpe and Sortino ratios provide insight into the risk-adjusted returns, offering a clearer picture of the fund's efficiency in generating excess returns over a risk-free rate.
Expense Ratio: This measure how much of the fund's assets are used for administrative and other operating expenses. Lower expense ratios can significantly impact net returns, especially in the long run.
However, expense ratio should not be a ‘make-or-break' factor. A low expense ratio is good but a moderate/high expense ratio isn't necessarily bad.
Portfolio Diversification: Assess the fund's asset allocation and sector exposure to ensure it aligns with your investment goals and risk tolerance.
Diversification reduces risk by spreading investments across various sectors and assets, mitigating the impact of a poor performance in any single area.
Fund Size and Liquidity: The size of the fund can affect its performance and liquidity.
Very large funds may face challenges in efficiently allocating resources, while very small funds may not have proven their market resilience.
Additionally, liquidity is crucial for entering and exiting positions without significantly affecting the market price.
Where to research these quantitative factors of equity funds?
On Dezerv's website that's optimised for mutual fund research!
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You can research mutual funds based on 100+ quantitative factors that Dezerv has made available on its mutual fund discovery and research platform.
Visit the Dezerv website and retrieve information on any mutual fund scheme that you want to research about.
Researching before investing in mutual funds is essential especially for DIY investors who don't have professional guidance.
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