Compare Mutual Funds

How to Compare Mutual Funds?

A comparative analysis is of great value in selecting the right mutual fund scheme to meet financial goals in the defined time. Mutual Fund comparison does not mean only looking at the past returns. Of course, returns are one of the measures of comparison but there are several other things that you should take into consideration.

You must perform a mutual funds research and should consider the following parameters for comparing mutual funds:

#1. Investment Objective

There are thousands of equity schemes with different investment objectives. Few fund categories under equity are large-cap, mid-caps, small-caps, and multi-caps funds. There are value funds, contra funds, and sectoral fund categories as well. All of them are equity-oriented mutual funds but have different investment objectives.

Likewise, there are many debt mutual fund schemes. When you compare any two or more mutual fund schemes you should know their investment objectives. 

Moreover, the portfolio manager will invest the funds pooled as per the investment objective. Hence it is important that the investor must pick-up the fund that is closer to their financial goals.

#2. Returns Benchmarked With

Every mutual fund is tied to a particular index or benchmark. The benchmark helps in comparing the mutual funds performance over a period of time.

For example, suppose equity mutual fund A is benchmarked to the Nifty 100 total return index. Keeping other parameters the same, for a given period if the index gained 18% and the fund A rises 20% then the fund has out-performed the index.

Whereas, if the index falls by 10% and the fund A goes down by 12% then fund A has under-performed for the given period.

Select the mutual fund scheme that has given consistently higher returns than its benchmarked index.

#3. Risk Type

Not all equity mutual funds are equal in risk. Small-cap equity mutual funds have more risk in comparison to large-cap mutual funds. The varying degree of riskiness of a particular mutual fund is due to the underlying investments it does.

You should compare mutual funds on the basis of their risk and pick the mutual fund scheme that matches your risk-taking capacity.

You can use the following risk metrics to compare mutual funds:

• Standard Deviation – Measures the fund’s volatility. The standard deviation measures how much a portfolio’s returns deviate from its average.
• Sharpe Ratio – Measure a fund’s risk-adjusted returns. 
• Sortino Ratio – Measure the performance of the fund with respect to the downward deviation. It is a modification of Sharpe Ratio.
• Alpha – Compares a fund’s performance to its benchmark.
• Beta – Measures the sensitivity of a mutual fund towards the dynamic market movements.

#4. Years in Existence

Mutual funds having a fairly long existence have seen all types of market cycles/ fluctuations. They have business experience and have grown over time in assets (AUM). Such mutual funds are from stable asset management companies (AMC) or fund houses.

So, you need to consider the number of years of mutual fund existence and their track record while comparing mutual funds.

#5. Exit Loads and Expense Ratio

Expense ratio and exit load are charges you pay to a fund house for mutual fund investments. The loads cover the management, redemption, and mutual fund administration expenses.

A mutual fund with a lower exit load and expense ratio is preferred. However, a mutual fund with a lower expense ratio does not mean that the fund is generating higher returns for you.

You should select a mutual fund that has higher returns even if it is charging slightly higher loads.

#6. Returns

Historical returns are a good indicator to study the mutual funds performance across different market cycles. One can estimate the potential returns from their SIP or lumpsum investments. They can use a mutual fund calculator to estimate returns. Scripbox’s SIP calculator can help estimate SIP returns and a lumpsum calculator for lumpsum investments. Investors can also compare funds based on their SIP return to select the fund to invest. Hence the returns calculator can help investors in mutual funds performance comparison.

#7. Portfolio

You can also compare the portfolio of a mutual fund with its peers. You can compare the allocation of funds across market cap, number of securities the fund has invested in, the portfolio holdings across sectors, etc. Furthermore, you can also compare the modified duration, average maturity and YTM of funds.

Why Should You Compare Mutual Funds?

There are 8000+ mutual fund schemes in India. Picking up the right mutual fund matching your financial goals, investment horizon, and risk-taking capacity is a huge task.

Moreover, mutual funds from a particular category look quite similar. This can confuse you. You could possibly choose the wrong mutual fund scheme. Mutual fund comparison helps you find the differences between them.

Mutual fund comparison will help you understand about the riskiness, investment objectives, consistency of returns, years in existence, and the quality of the fund.

All these factors help you in selecting the best mutual fund scheme for your investment needs.

Comparison of Equity Mutual Funds

The equity mutual funds invest a major portion of the portfolio in equity and equity-related instruments in various proportions. The proportions are based on the fund’s investment objectives. Equity mutual funds scheme is suited for aggressive investors that have the capacity to take higher risk. The equity mutuals are helpful in creating long-term wealth because they are a high-risk high return investment. 

The following tips will help you compare equity mutual funds in the right way:

• Compare returns over the long term. For equity mutual funds, the ideal duration to compare returns is 5, 7 or even 10 years. Also, compare the fund to its right benchmark. 
• Don’t look at absolute returns. Look for consistency of returns. When comparing returns in the long term you will get a fair understand of how the fund has performed across different market cycles.
• Compare the downside protection to ensure minimum losses during market corrections and turmoil.
• Consider all the risk measures and compare them with peers. 
• Analyze and compare the portfolio holdings to understand sector exposure and stock concentration.

Check out: Best Equity Mutual Funds to Invest

Comparison of the Tax Saving Mutual Funds

The tax saving mutual funds are no different than any other mutual fund with the only difference of having a tax benefit and a lock-in period. The amount invested is allowed as a deduction up to Rs 1.5 lakh under section 80C of the Income Tax Act, 1961.

The mutual fund portfolio is majorly equity-oriented and the lock-in period for tax saving mutual funds is 3 years. The tax saving mutual funds are also known as Equity-Linked Mutual Funds ELSS. In case the investment is made through SIP, the lock-in period is calculated for every installment of investment.

The benefits of investing in a tax saving mutual fund or ELSS are listed below:

• ELSS allows an investor to save taxes as well as the benefit of the growth and returns from the underlying assets provided in the ELSS mutual fund portfolio. Where other tax-saving schemes like PPF, NSC, Fixed Deposit, etc provide an average of 8% returns on investment, ELSS provides a better return being a diversified portfolio.
• An investor can invest as low as Rs 500 in ELSS, turning an investor’s small savings into an investment. This helps build a habit of continuous saving.
• The tax benefit an equity-linked mutual fund carries makes it more attractive for investors. Other mutual funds such as debt-oriented mutual funds, liquid funds, do not provide a tax benefit to its investors. The amount invested is allowed as a deduction up to Rs 1.5 lakh, the capital gain earned on maturity is exempt up to Rs 1 lakh.

Check Out: Best Tax Saving Mutual Funds to Invest

Comparison of Debt Funds

Debt mutual funds invest a major portion of the pooled funds in debt and money market instruments having specified maturities.

Examples of underlying debt and money market instruments are;

• Corporate bonds
• Debentures
• Government securities
• T-bills
• Commercial papers (CP’s)
• Certificate of deposits (CD’s)

Debt mutual funds investment is best for risk-averse or short-term investors who prefer capital protection over fund appreciation. Debt funds do not have wide market fluctuations like equity markets. However, there is an element of default or credit risk in debt mutual funds. Hence investors have to ensure that the portfolio has more of AAA and AA rated securities to minimize credit risk.

The debt mutual funds are better suited for short to medium-term life goals like creating a corpus of emergency funds, funds for the wedding, buying a dream car or retiring debt. 

In addition to the above criteria mentioned for equity funds, you need to consider the following additional factors for debt funds:

• Modified Duration helps in understanding the interest rate risk of the funds. 
• Credit Rating is useful to understand the credit quality of the debt securities in the portfolio. Low rated securities are high risk instruments and high rated securities are low risk.

Check Out: Best Debt Funds to Invest

Comparison of Liquid Funds

As per the SEBI categorization of mutual fund schemes, the liquid mutual fund invests in securities that have a specific maturity of up to 91 days only. Liquid funds primarily belong to the debt category of mutual funds.

The investment objective of the liquid mutual fund is to create a highly liquid corpus of emergency funds. Thus you can use liquid funds for creating a corpus of funds for financial goals like emergency funds for paying education fees, medical emergency or income support in case of job loss.

Liquid funds offer a lower return in comparison to equity or hybrid mutual funds that carry a high risk. Thus, liquid funds are a low risk and low return investment option, best for the risk-averse, short-term investors.

Check out: Best Liquid Funds to Invest

Common Mistakes to Avoid When Comparing Funds

The following are the common mistake that you should avoid while comparing mutual funds:

• Comparing Only Short-Term Returns: Some investors only consider short-term returns, up to 1 year, when comparing mutual funds. However, this data can be misleading, particularly for Equity Funds, which are known for high levels of short-term volatility. To get a more accurate performance assessment, long-term returns of Equity Mutual Funds should be considered. 
• Single Criterion Comparison: It is not advisable to base investment decisions on a single criterion, such as returns or risk. Using just one criterion does not provide enough information to determine if a specific fund is a suitable investment. To make a more informed decision, investors should compare mutual funds using multiple criteria such as consistency of performance, risk, portfolio details, etc.

Popular Fund Comparison

• Axis Bluechip Fund Vs SBI Bluechip Fund
• Parag Parikh Flexi Cap Fund vs Kotak Flexicap Fund
• SBI Focused Equity Fund vs SBI Small Cap Fund
• ICICI Prudential Bluechip Fund vs HDFC Top 100 Fund
• Mirae Asset Tax Saver Fund vs Axis Long Term Equity Fund