Mutual Funds in India – Where to start? – Part 3

This post is an introduction to the different cateogies in mutual funds, their characteristics, their portfolio type, what one should expect from investing in them and who each of the categories are appropriate for. We will deep dive into equity mutual funds and look to develop the intuition required to pick a fund best suited for our individual needs. Oh, we will also talk to the magic mirror.

PUTTING THIS TO PRACTICE

Disclaimer – The funds or fund houses discussed on this post are NOT meant to be investment recommendations. Reader discretion is advised. Please do your own due diligence or discuss it with your financial advisor before investing in any of the mutual funds discussed in this post.

This is part 3 of a three-part series on mutual funds in India. Part 1 is an introduction to the different types of mutual funds, Part 2 unravels the secrets to picking winning equity mutual funds, and this column, Part 3, is a practical implementation guide.

Let’s say that reading this post has intrigued your interest in Parag Parikh mutual fund. How do you evaluate it to make sure it is right for you? Here is how to do it.

Step 1 – Go to valueresearchonline.com and search for Parag Parikh. You end up on this page about Parag Parikh Long Term Equity Fund.

Step 2 – First thing you will want to see is the size. You’d want to invest in a fund that has at least Rs.250 crores in assets under management. There is a section called “Basic Details” on the page where you can find this.

Step 3 – You can also check the expense ratio/fees the portfolio manager charges you on that box. It is usually between 0% to 3% and anything over 2.4% is quite expensive. But if you believe in the fund manager/fund house, don’t worry about this – They will make far more money for you.

Step 4 – Glance through this graph on the page. Every scheme defines its own benchmark, which is the index it compares its performance against. What you want to see on this graph is the blue line staying above the grey line on an average. The higher the gap between the two, the better it is.

Step 5 – Check how concentrated the mutual fund portfolio is. Too many stocks (>100) or too few (<10) are both bad. The sweet spot is between 30 and 70 stocks. Also check the weightage of the top 5, 10 stocks as a % of the overall portfolio. Ideally, you don’t want to see a very high % invested in the top 5 stocks.

Step 6 – Check the box called Risk Measures. You have read all about Sharpe ratio, beta and alpha on this page. Review those metrics and see how they compare with others.

Step 7 – Check the top holdings/portfolio composition. If these top companies are household names you can recognise, then take comfort. If they are little-heard-about with no history of operations at all that you can find on the internet, take your money and run away as fast as you can.

Step 8 – Finally, find out who the portfolio manager is. Look him up on LinkedIn to see what he has been up to in his life. Search for him on Youtube, see if there is an interview of him. Listen to him. If he looks & sounds like the type of guy you would hand over your money to and forget about it for a decade, then you have found yourself a winner!

Now go away and make a lot money 🙂

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