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Why compare Mutual Fund schemes?
- Having numerous options is beneficial but can also create confusion. Mutual Funds comparison allows investors to go through multiple choices, helping them make informed decisions aligned with their investment goals.
- By understanding how to compare MFs based on performance and other crucial features, investors can design a well-balanced investment portfolio that minimises risk and maximises returns.
How to Compare Mutual Funds: The Parameters
Mutual fund comparison involves evaluating various parameters to ensure the chosen scheme aligns with your financial objectives. Here are the key parameters to consider:
Prospective investors often examine the schemes' 1-year, 3-years and 5-years returns to gauge their performance.
These criteria assess how a fund has performed against its benchmark index, providing insights into its relative performance.
The annual percentage that the fund house charges for managing your investment. Staying within SEBI-defined limits ensures cost-effectiveness.
Various ratios, including Standard Deviation, Sharpe Ratio, Sortino Ratio, Alpha and Beta, provide insights into the risk and return profile of the MF.
It includes factors like allocation across market caps, number of securities, average maturity, modified duration, Yield-to-Maturity (YTM) and portfolio holdings.
Advantages of Mutual Fund Comparison
Informed Decision-Making
Empowers investors to make decisions based on comprehensive data, reducing the risk of uninformed choices.
Risk Mitigation
By assessing risk parameters, investors can align their portfolios with risk tolerance, minimising potential downsides.
Goal Alignment
Allows investors to select funds that align with their specific financial goals and investment horizon.
Cost-Effective Investing
Keeping an eye on expense ratios ensures investors maximise returns by minimising management fees.
Avoiding common mistakes in Mutual Fund comparison
In Mutual Fund comparison, steer clear of pitfalls for better decisions. Here are the common mistakes that investors should avoid:
- Don't fall into the short-term focus trap; 1-year returns may mislead, especially for volatile Equity Funds. Opt for a more insightful approach by considering long-term returns for a comprehensive view.
- Another pitfall is the single-criterion decision trap. Basing choices solely on one factor, like returns or risk, oversimplifies the process. A better strategy involves considering multiple criteria, such as consistency, risk measures and portfolio details.
- Lastly, pay attention to a holistic evaluation. Focusing only on performance numbers may lead to neglecting crucial factors. Adopt a comprehensive approach, considering various criteria for making the right decisions aligned with your financial goals. Avoiding these mistakes, helps navigate MFs strategically.
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