How to Choose best Mutual Funds

Mutual Fund

A mutual fund is a pool of money that is professionally managed for the benefit of all shareholders. As an investor in a mutual fund, you own a portion of the fund, sharing in any increases or decreases in the value of the fund. A mutual fund may focus on stocks, bonds, cash, or a combination of these asset classes.
Things to Remember about Mutual Fund
· Past Performance is not the guarantee for the future performance but it can be taken as a parameter to find out the relative performance.
· There is a cost associated with mutual funds when it is bought which affects the overall returns.
· A mutual fund does not guarantee the safe returns as bank fixed deposit or Govt. bonds even if you buy the MF from bank or even if the MF has banks name associated with it.

There are so many MF in the market and how to decide which one to buy is a difficult question for lot of people. Lot of us depends on our MF agents/advisor and to be honest, not many know about the product themselves, they come with the small knowledge which they have been told by the marketing team. Half knowledge can be very dangerous, so how to choose the MF.
There are few indicators which are used by finance industry to assess the risk towards the MF or stocks or bonds which can be used to check the risk of fund you want to buy.

1. Alpha:
In finance, alpha is a financial measure giving the difference between a fund's actual return and its expected level of performance, given its level of risk (as measured by beta). A positive alpha indicates that a fund has performed better than expected based on its beta, whereas a negative alpha indicates poorer performance.
Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. For investors, the more positive an alpha is, the better it is.

2. Beta:
Simply stating Beta is a measure of a stock's volatility in relation to the market. By definition, the market has a beta of 1.0, beta of 1.0 indicates that the investment's price will move in lock-step with the market. A investment that swings more than the market over time has a beta above 1.0. If investment moves less than the market, the investment's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less risk but also lower returns.
Conservative investors looking to preserve capital should focus on securities and fund portfolios with low betas, whereas those investors willing to take on more risk in search of higher returns should look for high beta investments.

3. R Squared:
A statistical measure that represents the percentage of a fund or security's movements that can be explained by movements in a benchmark index. An R-squared of 100 means that all movements of a security are completely explained by movements in the index. A high R-squared (between 90 and 100) indicates the fund's performance patterns have been in line with the index. A mutual fund should have a balance in R-square it should not be more than 90 and less than 80 . A mutual fund with less than 80 rsquare shows that they have more tendency to be volatile. Mutual fund investors should avoid actively managed funds with high R-squared ratios, as being “closet” to index funds. In these cases, why pay the higher fees for so-called “professional management” when you can get the same or better results from an index fund.

4. Sharpe Ratio:
The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed.

You can visit the Value Search online for your research on mutual funds; this site provides you with all the details you require for any mutual fund.
Some of the Top Fund with high returns are listed below:
1. DSPBR Equity 5Yr Return 29.2%
2. Reliance Diversified Power Sector Retail 5Yr Return 39.1%
3. Canara Robeco Equity Tax Saver 5Yr Return 28.5%
4. Sundaram BNP Paribas Select Midcap Reg 5Yr Return 27.5%
5. HDFC Top 200 5Yr Return 28.34%


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