Assessing a mutual fund


Each mutual fund scheme has its own investment philosophy, at a broader level fund houses too have their investment philosophy which applies across all their schemes. For instance, Reliance Mutual Fund is known for discovering undervalued stocks which have robust future growth potential. So, investing with this fund house could mean a lower downside risk with decent upside potential. In the case of Birla Sun Life Mutual Fund, its goal is to invest in companies with large growth potential, run by a capable and ethical management and which are currently available at reasonable valuations.

The investor must find out before investing whether the fund house whose scheme he or she is planning to settle for has a specific investment philosophy and more importantly, the investor must be agreeable with it. Additionally, it must also be checked if the fund house is adhering to its philosophy and is not getting swayed by market sentiments.

According to the Association of Mutual Funds in India (AMFI), the Indian mutual fund industry consists of 29 active fund houses with Assets under Management (AUM) in excess of Rs. 300,000 crore offering numerous schemes to match the investment choices or options of the diverse investor community.

This large number of fund houses and schemes means a greater choice for investors it has made the task of selecting the right fund house and scheme more difficult. In this article we are discussing various parameters that can be used to assess which fund house is suitable for investments by different investors.

The movements of the Net Asset Value of various schemes of a fund also give an indication of whether the fund house is risk averse or not. NAV movement over a period of time has to be observed in comparison to the market and similar schemes of other fund houses. If there are comparatively excessive spikes, it means that the volatility level in terms of returns generated is high. This in turn means that the fund house under consideration is risk prone. It shows that the fund house is willing greater risks in the hope of making better returns, at the cost of preserving its capital.

A mutual fund house incurs a number of expenses to run its business and schemes. Most of these expenses are charged irrespective of the performance of the scheme. The NAV of a scheme is net of such expenses. Although each scheme has its own expense ratio, a glance at the expense ratios of a number of schemes from the same stable in comparison to similar ones of other funds could give an idea whether the expenses are justified or the fund house merely has a liberal expense policy. This in turn will have an impact on the investor earnings.

The investor must also assess the quantum of entry load and exit load charged by the fund house’s schemes, since they have an impact on investment returns. While an entry load increase’s investor’s purchase cost, an exit load will correspondingly reduce the selling price. Once again, if a fund’s schemes have a higher entry and exit load vis-à-vis its peers, then it means that cost of investing would be higher to that extent.

The size of the fund’s AUM is also an important parameter that must be assessed. This is because the higher the AUM, the better will be the economies of scale that the fund house can enjoy. Further, there is a lower possibility of the fund house having to compromise in attracting talent and retaining it. Additionally, the fund house will also be able to sustain a larger and more capable research team and support staff. This in-turn will take the fund house one step closer to choosing the right investments.

To sum up, many critics believe that it is not important to assess a fund house as long as the scheme that is chosen has been a consistent performer and its objectives match that of the investor. A good fund house is one which delivers returns on a consistent basis. Making allowances for market conditions, if most of the schemes of a fund perform consistently, it reflects sound overall management. The future performance of these schemes is also is also likely to be more predictable.