Mutual Funds Mastery Part 2

Welcome back to part 2 of the series. Mutual Funds Mastery Part 2, now, we are going to discuss how to do the perfect analysis of any fund in detail, step by step, so let’s begin.

Mutual Fund Investments Are Subject To Market Risk

We are all familiar with this statement , though we know that mutual funds are good instrument to invest but not all funds are good enough to invest our hard earned money .

Key Parameters

Do Visit this free websites for the fund analysis

Value Research :-https://www.valueresearchonline.com

Advisor khoj:-https://www.advisorkhoj.com

Ticker tape:-https://www.tickertape.in

To get familiar with this content, I suggest you go through part 1 first of all we need to define our risk profile [low risk , medium risk , high risk] we should also make sure that we should not invest all the money that we are having with us today .The basic rule of inesting is to invest the amount which you don’t even need today for a salaried person it would be atleast (20 to 30%) of the salary depends on person to person if one who spends only for the needs not for desire may invest (50%) of salary .

The most important thing is theasset allocatione basic terminology is that (ex. 100%of the salary amount , out of which 40%spent on the groceries , bills ,etc, 20% in FD ,20% in health or medical insurance, rest 20% allocated to mutual funds.) WE NEED TO BE PREPARE FOR ALL WE DIDN’T KNOW WHEN WE HAVE NEED OF MONEY SO SOME IN FD’D AS WELL , INSURANCES ARE NEED OF TODAY NO PERSON’S MONEY SHOULD BE SPENT ON THE HOSPITAL BILLS AND THE 20% AMOUNT SHOULD BE INVESTED EACH MONTH AND SHOULD MAKE A STEP UP OF 10% ANNUALLY FOR EVERY YEAR , IN COMPOUNDING THE SMALL STEPS MATTERS FOR EXPONENTIAL WEALTH CREATION .

STEP 1

Asset Allocation

ex. For Young Person (Portfolio) INVESTMENTS (FOR A CERTAIN AMOUNT 100% WHICH IS SOLELY FOR INVESTING, 35% SMALL-CAP , 10% LARGE-CAP,10%GOLD MUTUAL FUND OR ETF, 35% MID-CAP , 10% REAL ESTATE ) As the person is young so he or she might not have that much of responsibilities and they are fit and fine as well, if he or she aims to create great wealth till the age of retirement so the most of the portion is in MID & SMALL-CAPS so as to get a big chunk in next 20 to 30 years.

FOR OLD AGE PERSON (Portfolio) INVESTMENTS (60 TO 70% LARGE-CAP,10% GOLD MUTUAL FUND OR ETF , 20% NATIONAL PENSION SCHEME ) Here the person is old and it’s risk profile is less and any time the requirement of money is to be needed , due to the health issues so larger portion is in the LARGE-CAP and other amount in NPS.

DECISION

The funds are of 3 categories

1. DIRECT GROWTH – BENEFICIAL FOR THE INVESTOR AS WE DON’T NEED TO PAY THE COMMISSION TO THE AMC AND THE MONEY’S GROWTH IS HIGHER HERE; BUT YOU DON’T GET ANY DIVIDEND FROM THE AMC .
2. IDCW (INCOME DISTRIBUTION CUM CASH WITHDRAWAL) – IN THIS PLAN THE AMC GIVES YOU THE DIVIDEND AFTER THE DEFINITE INTERVAL OF TIME . MONEY GROWTH IS QUITE OK HERE.
3. IDCW REINVEST -DCW (Income Distribution cum Capital Withdrawal) distributes profits to investorsInstead of receiving cash payouts, the distributed amount is reinvested into the same fund. Investors receive additional units, but the NAV drops after distribution.IDCW reinvestment does not create new units like a bonus plan—it simply reinvests the payout.
4. BONUS PLAN -Mutual funds issue bonus units to investors free of cost.The NAV (Net Asset Value) reduces, but the total investment value remains the same.Investors benefit from additional units, which may lead to higher returns over time.

CONCLUSION

If we are expecting the dividend from the mutual funds the the IDCW plan is for you and if you want some dividend to be reinvested again into the scheme then the IDCW REINVEST plan is there . If you are strictly focused for the growth then the GROWTH plan is for you .’ THE EXTREME GROWTH IS SEEN IN GROWTH PLAN BECAUSE NO ANY AMOUNT IS GIVEN TO THE INVESTOR AND SO ALL THE ALLOCATED CAPITAL GROWS EXPONENTIALLY ‘.

STEP 2

ANALYSE THE PARAMETERS , COMPARE THE FUNDS IDENTIFY THE SIMILARITIES AND DIFFERENCES BETWEEN THE FUNDS OF SIMILAR CATREGORY

EXPENSE RATIO

GO TO THE ABOVE WEBSITE SELECT THE CATEGORY OF THE FUND AND LOOK AT THIS METRIX . IN THESE ABOVE DISCUSSED WEBSITE WE CAN CREATE A SCREENER FOR US ACCORDING TO POINTS AS DISCUSSED FURTHER .

EX. REFER THE IMAGE

AUM (ASSETS UNDER MANAGEMENT)

If the Mutual Fund company is having greater no. of assets then it seems to be reliable so in the above image the top 5 players are best according to the aum category . It shows that how many people are investing in this theme .

CAGR (COMPOUND ANNUAL GROWTH RATE)

It depicts how the scheme is giving you the returns HIGHER IS BENEFICIAL , it is a useful metric that represents the yearly rate of return of an investment over a specified period, assuming the growth is compounded annually .Generally the 3 & 5 YEAR CAGR is considered best parameter for analysing the funds . For a extreme long-term investing 10 years can also be considered .

EXPENSE RATIO

It is the fees charged by the AMC(ASSET MANAGEMENT COMPANY) so less is beneficial .

Ex. 2 funds of similar category (Small-cap)are having the expense ratio of 1% and the other as 0.60% so according to our parameter, the fund having 0.60% is best for investment because every penny matters and in long term this difference gets converted in to huge amount. Generally it lies between (0 to 1%) .

3 YEAR AVG. ROLLING RETURN

It depicts how consistently the fund is performing the HIGHER VALUE is beneficial.Your fund should be like Dravid playuer consistenlty delivering the returns inspite of the market sentiments .Menas in othewords ‘ MARKET BULLISH HO YA BEARISH MUJHE TOH RETURNS MILENGE’.

MAXIMUM DRAWDOWN

The parameters which give an idea that when the market corrects , what’s the drawdown of the fund LESS IS BENEFICIAL .

SHARPE RATIO

The Sharpe Ratio is a financial metric that measures the risk-adjusted return of an investment. It helps investors understand whether the returns of a portfolio are due to smart investment decisions or excessive risk-taking. HIGHER IS BENEFICIAL IN THIS CASE.The Mutual Funds having the higher Sharpe Ratio is appreciated.

ROLLING RETURNS OR TER

Total Expense Ratio (TER) represents the cost of managing a mutual fund, expressed as a percentage of assets. It includes management fees, administrative costs, and other expenses. A lower TER is generally better for investors, as it means fewer fees are deducted from returns .

FINAL CONCLUSION

The Best Mutual Fund from the above image by considering all the parameters is the BANDHAN SMALL CAP FUND Because the DRAWDOWN is less as com[pared to the above 2 funds and it is very important [WHEN THE MARKETS ARE WELL THE FUND GIVES GREAT RETURNS BUT AS THE MARKETS FELL DOWN,IT SHOULD BE CORRECTED BY FEW PERCENTAGES AND SHOULD BE LESS THAN THE MARKET ] then the fund is good . The psychology behind this is markets will take the part of profits from you so you have to give less amounts to the markets and take extra ordinary returns from the markets .