We will discuss three important topics here:
- 5 Useful tools to analyze Mutual Fund schemes.
- Top 10 Mutual Funds to invest Amidst Corona Crisis.
- How to invest in them in less than 5 minutes.
5 Useful tools to analyze Mutual Fund schemes
Don’t trust blindly. Before investing in any mutual fund focus on these 5 tools.
- Alpha (α)
Alpha is a term used in investing to describe a strategy’s ability to beat the market. The excess return of an investment relative to the return of a benchmark index is the investment’s alpha.
Suppose Mutual Fund ‘A’ has delivered a return of 10% and in the same year S&P BSE SENSEX has delivered 8% returns. Then Alpha of Mutual Fund ‘A’ would be +2% (10–8).
Alpha may be positive or negative and is the result of active investing. It is often represented as a single number (like +3.0 or -5.0), and this typically refers to a percentage measuring how the portfolio or fund performed compared to the referenced benchmark index (i.e., 3% better or 5% worse).
2. Beta (β)
Beta is simply a measure of the volatility of a security or a portfolio, compared to the market as a whole. Beta is calculated using regression analysis and it represents the tendency of an investment’s return to respond to movements in the market.
- A beta of 1.0 indicates that the investment’s price will move in lock-step with the market.
- A beta of less than 1.0 indicates that the investment will be less volatile than the market.
- A beta of more than 1.0 indicates that the investment’s price will be more volatile than the market.
For example, if a fund portfolio’s beta is 1.2, it is theoretically 20% more volatile than the market. The investor must decide his/her risk profile and then invest accordingly.
3. R-squared (R2)
R-squared is a statistical measure that represents the percentage of a fund portfolio’s movements that can be explained by movements in a benchmark index.
R-squared values range from 0 to 100. A mutual fund with an R-squared value between 85 and 100 has a performance record that is closely correlated to the index. A fund rated 70 or less typically does not perform like the index.
Example: If any fund has an R-squared of 90 then it means that 90% of the scheme’s price movement can be explained by the index movement.
If an investor seeks a Mutual Fund scheme whose performance should be strongly correlated to S&P BSE SENSEX then he/she should look for schemes with higher R-squared to the index.
4. Standard Deviation
The standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical performance. A volatile Portfolio/MF scheme has a high standard deviation and vice versa.
A lower standard deviation isn’t necessarily preferable. It all depends on the investments one is making, and one’s willingness to assume the risk. More aggressive investors may be comfortable with an investment strategy that opts for vehicles with higher-than-average volatility, while more conservative investors may not.
Standard deviation is one of the key fundamental risk measures that portfolio managers use. Investment firms report the standard deviation of their mutual funds and other products. A large dispersion shows how much the return on the fund is deviating from the expected normal returns. Because it is easy to understand, this statistic is regularly reported to the end clients and investors.
5. Sharpe Ratio
The Sharpe ratio was developed by Nobel laureate William F. Sharpe and is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
The Sharpe ratio tells investors whether an investment’s returns are due to wise investment decisions or the result of excess risk. This measurement is useful because while one portfolio or security may generate 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 an investment’s Sharpe ratio, the better its risk-adjusted-performance.
Note: The greater a portfolio’s Sharpe ratio, the better its risk-adjusted-performance.
Top 10 Mutual Funds to invest Amidst Corona Crisis.
Based on those 5 and other factors, I have listed down the top 10 mutual fund schemes with subcategories.
- Kotak Emerging Equity Fund — Direct Plan (★★★★★)
- Mirae Asset Emerging Bluechip Fund — Direct Plan (★★★★★)
- Mirae Asset Hybrid Equity Fund — Direct Plan (★★★★★)
- Kotak Standard Multicap Fund — Direct Plan (★★★★)
Tax Saving Funds
1. Axis Long Term Equity Fund — Direct Plan (★★★★)
2. Aditya Birla Sun Life Tax Relief 96 — Direct Plan(★★★★)
All are growth funds, ratings have been taken from value research.
Important: If you look closely then post-crisis, most of these funds delivered massive returns range from 60% to 157%. So, this could be another opportunity for us to allocate some funds in some good Mutual Funds. isn’t it?
How to invest in them in less than 5 minutes.
Although you can invest via your own resources but I personally found this method very easy, trustworthy and convenient.
You must be using Paytm right? Select Paytm Money.
After installing Paytm money, just search the fund, select the amount, pay instantly online and within 5 minutes your money would be invested in the desired mutual fund. You can also track your investment on daily basis.
Join Free Marketnotes telegram channel to get more useful articles like this, straight into your inbox: Join here