Most of our search or interaction for investment ends up inquiring about the best mutual fund available in the market.

The post is to address the fundamental issue of whether we should invest in the Best mutual fund or Right mutual fund, which can help us to meet financial goal requirements.

Best mutual funds are best in their respective categories like largecap, Midcap or Smallcap and compared with respective peer groups. The best may not be suitable for your investment objective. 

Investing in best may end up you taking the undue risk or lower return or paying higher taxes or inferior liquidity.

There are also issues related to over-diversification. An investor having all the best schemes available in the market will end up holding the majority of the market. It will considerably reduce additional return generation for your portfolio.

Read my view on whether to buy the best mutual funds or Right mutual funds.

What to look for in Best Mutual fund?

The criteria used by multiple agencies and research firms to analyze and rank various mutual fund schemes vary from company to company. Listed are my 5 standards to look for the best mutual fund scheme.

Performance

Once you are on google searching for the best mutual fund to invest, there are thousands of websites and firms to help you.

Scheme return across different periods will be the most common parameters on which schemes would be ranked. Though in my opinion, performance can be one of the parameters to judge the fund but not the only yardstick.

Returns of the scheme should be compared on two parameters, with the market (benchmark) as well as among peers (Large-cap, Midcap, small-cap).

The benchmark comparison will give an idea as to how the scheme has performed compared to the market in general. Peer performance comparison indicates as to how well managed scheme has been across time.

To look for returns of the scheme on both parameters can be viewed at value research website or moneycontrol website.

Research Ranking

There are various research agencies like CRISIL or Value research that publish ratings of schemes periodically based upon multiple parameters.

A fund, if consistently in the top quartile or top-rated, is consistent in its approach and execution.

CRISIL mutual fund ratings are based upon parameters like active returns, portfolio concentration, Liquidity analysis, volatility.

CRISIL ranks the scheme in five categories ie, rank 1-5. Rank 1 consists of top 10 percentile, level 2 from 11 to 30 percentile, position 3 consists of 31 to 70 percentiles, position 4 will be from 71 to 90 percentile, and bottom Rank 5 will have 91 to 100 percentiles.

The company publish their ranking every quarter and is free. You can access their latest ranking by clicking here. 

Value research rating depends upon risk grade and returns grade; they assigned to funds based upon their internal parameters. The final score for a scheme is calculated by subtracting the fund’s Risk Score from its Return Score.

Based on the following distribution

Star ratings are assigned. 5 star is assigned to top 10% percentile, 4 star for next 22.5% percentile, 3 star to next 35% percentile, 4 star to next 22.5% percentile and one star to bottom 10% percentile.

The company publish their ranking every month and can be accessed free.

Risk Parameters

These are technical parameters that give you an indication as to how well the fund managed by the fund manager across the periods.

These parameters are

1. Standard deviations – Its value shows the total volatility of the fund. A higher value indicates a higher variation in return.
2. Sharpe Ratio – The value indicates the return generated by the fund for each unit of risk taken. A higher value indicates better performance per unit of risk compared to its peer group.
3. Alpha – Shows additional return generated compared to its benchmark. It shows the value added by the fund management team.  
4. Sortino Ratio – Reflects fund performance in a falling market. How well fund protects downside risk compared to peers.
5. Beta – Value indicates the movement of the fund performance compared to the market. A value higher than one indicates wider swing than market and vise versa

The values of these parameters can be accessed free through value research website.

Scheme expenses

The returns published by mutual fund schemes are post expense deduction. So the performance published by fund houses is net return, which an investor will get in his hand.

The SEBI directive governs the expenses charged by the funds, and SEBI has directed new slabs to be charge for fund management. The new slab has been active from 1^st April 2019.

The expense charged is based upon assets managed by a particular scheme. A fund can charge higher in smaller assets scheme, and the charges keep on decreasing as the fund size increases.

An investor would be well of if the scheme has a bigger size as the average expense charged will be reduced and keeps on coming down with increasing AUM.

The details can be accessed through the respective mutual fund company website or AMFI website.

Fund Manager

All active funds’ performance, the majority of the time, depends upon the fund manager who is managing the fund.

A fund manager who managed funds in various business cycles and up and down of the stock market always helps. He will be able to absorb the pressure in tough times and make the right decisions.

Always choose a fund manager who is sticking with a particular company for a relatively long-time and is consistent with his investment approach. 

Selecting Right Mutual fund

There is multiple best mutual fund scheme available in the market. There are various websites and agencies which will show you ranking and rating of plans from time to time.

The investor has to keep in mind that the best scheme may not be the right scheme for you.

The reason is that the best scheme of equity category may not be able to suitable meet investor short term goals.

Similarly, The best debt fund may give consistent good returns but will not able to meet his long-term goals.

Therefore, selecting the RIGHT mutual fund scheme is more important than the best mutual fund for investors. The right fund may not give the highest return but will meet our goal requirement without taking undue risk.

To find the right mutual fund, We need to keep the following things in mind.

Investment objective

Goals are the most crucial factor of any investment or saving. Investor first needs to define the purpose for which we need to accumulate the money.

Defining the purpose helps in explaining two fundamental things— the time which one has to achieve the goal and quantum of money required to meet the goal.

Asset allocation can be effectively devised by clearly defining the investment objective.

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Riskier assets like equity schemes can be advised for goals that are 10 to 15 years ahead.

Equity schemes can deliver higher returns and thus reduce resource allocation for goals that are more than ten years ahead.

Whereas Short term goals, which are less than five years, should be achieved through less volatile assets like fixed deposits, Government Post office schemes, Debt Mutual funds, or companies’ bonds. 

Taxation

The tax incidence also plays an essential role in planning for our financial goals as the post-tax returns are lower than pre-tax profits.

The whole financial planning or goal planning goes for a toss if the taxation part is not taken into consideration.

Mutual fund investment has two types of capital gains. The Long term capital gains(LTCG) and Short term Capital Gains (STCG).

Gains defined by the holding and different asset classes. Equity has a holding period of 12 months to be qualified as long term capital gains. For more details, do read.

We need to select schemes with lower tax incidence and aware of tax structure so that maturity value is known beforehand, and there are no negative surprises.

Ease of operation

The ease of operating is essential. In an emergency, one cannot get money back in time; the whole purpose of investment and saving fails.

There is numerous transaction vehicle available to operate a mutual fund. platforms are available from mutual fund companies, the registrar like Karvy or CAMS; various fintech companies are providing their platform, Stock exchanges like NSE and BSE also provide transaction platforms.

One has to choose that transaction platform that you familiar with and used by the majority of investors.

My personal opinion is that mutual fund companies taking services from CAMS are better as their online support and operational efficiencies are better as compared to other registrar and transfer agents

Management Team

Most of the investment we do, associate with risk; therefore, it becomes vital and essential to give our hard-earned money to a company that has a capable management team.

Capable management can help investors in multiple ways. For example, the management is responsible for making the team of the fund manager, compliance risk, and ensuring that every entity does its job efficiently.

Efficient managment considerably reduces the risk for the investor and increase the prospect of consistent performance.

Fund Size and Fund Manager

In my opinion, this is the least important criterion for selecting the right fund though important.

As fund expenses are directly related to the assets it holds, a fund with significant AUM will have lower fees, and funds with lower assets will have a higher cost.

As expenses deducted from the asset, higher costs will eat into funds return and have a compounding effect in the long term. Over an extended period, the expense would play a very crucial role in the maturity amount.

A capable management team can take the fund size. The managment capable of expanding and motivating their sales team can gather assets quickly and thus reduce the expenses.

Experience always counts in any field. In the financial area, it makes even more importance, a fund manager having seen various market cycles and worked in different sectors of the economy, always add more value to fund management.

Bottom line

There are multiple advisors and advice available for choosing from the best mutual fund schemes available in the market.

The question which you as investors have to ask is whether the best mutual fund scheme is right for your investment objective.

The success of your saving or investment lies in defining the objective, disciplined approach and selecting the right scheme (not best scheme).

Do share your comment and observation in the comment section below. Also, do let me know any issues which you would like me to write.