What are the different factors to compare mutual funds?

Mutual funds are suitable investment options for every type of investor. When it comes to investing in mutual funds, you have a plethora of fund options which you can choose based on your investment strategy, investment goal, time frame, and your risk profile. There are various categories of funds available with many subcategories. There are 44 mutual fund companies operating in India which offer schemes in each of the fund categories. Though you can decide which category of funds to go with, all funds in that category would look similar. Hence, the mutual fund comparison task is quite challenging. However, funds within the same category can be compared based on various factors.

Following are the factors to compare mutual funds:

• Performance consistency:

Mutual fund comparison can be done based on the consistency of performance over the years. You can also compare the fund’s performance against the benchmark. Funds that outperform the benchmark index can be your preferred choice. Let’s say you are planning to invest in large-cap equity funds, you can compare mutual funds based on the performance consistency as below:

Fund Name

Return

1-year

3-year

5-year

Canara Robeco Bluechip Equity Fund

14.00%

25.03%

20.21%

Axis Bluechip Fund

11.99%

21.44%

18.74%

Baroda BNP Paribas Large Cap Fund

16.93%

23.12%

18.09%

Kotak Bluechip Fund

15.64%

25.20%

18.83%

UTI Master share Fund

17.37%

25.73%

18.93%

• Risk measures:

As mutual funds are market-linked investments, every fund carries a certain degree of risk irrespective of the category and type. The higher the risk higher is the return. This is applicable when it comes to deciding the category. If you have to do a mutual funds comparison within the same category, you need to use different risk measures to decide the best suitable one for you. You can compare mutual funds based on various financial ratios such as Sharpe ratio, standard deviation, alpha, and beta. These ratios will give you an idea of the fund’s potential to reward you over the years.

• Portfolio constituents:

Mutual fund comparison can also be done based on its portfolio constituents. Sector allocation of mutual funds is done based on the investment objective of the fund. The risk profile of the fund is highly impacted by the sectoral allocation of funds corpus. Hence, it is important to consider the sector allocations and underlying securities in the fund’s portfolio to compare mutual funds.

• Expense ratio:

Every investment comes with a cost. Mutual funds are no exception. As you get the benefit of professional management and many other unique benefits, mutual funds do come at a cost. The cost of the fund is measured in terms of the expense ratio. Basically, the expense ratio is the fees collected annually for managing your portfolio. The expense ratio will have a significant impact on the fund’s return as it is charged as the percentage of fund size or asset under management. Hence, it is wise to look for funds that have a lower expense ratio. The expense ratio is an important factor of consideration for mutual fund comparison.

• Fund manager’s track record:

To compare mutual funds, it is important to take into consideration of fund managers’ track records. How the fund managers’ decisions have impacted the fund’s performance needs to be taken into consideration.

Along with all the factors, you need to consider many other elements of the mutual funds such as the age of the fund, asset under management or the fund size, exit load, investment horizon, etc. while comparing mutual funds. Mutual fund comparisons on various parameters help you make the right and informed investment decision.

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