Hello, Dear Readers,

I trust you're all well. I hope everything is going smoothly in your lives. Before we delve into the heart of this article, I'd like to inquire if you've had the opportunity to explore our series of posts on mutual funds. If you have, please feel free to continue with this article. However, if you haven't had the chance yet, I encourage you to peruse our collection of articles dedicated to the analysis of mutual funds, here (Part-1, Part-2, Part-3, Part-4, Part-5 and Part-6).

You might be wondering why I'm suggesting you do this. The reason is simple: I believe that when it comes to investing in mutual funds or any other asset class, we shouldn't solely rely on the recommendations of others. Off course, if you have the means to engage a qualified financial advisor to manage your finances, that's a sound choice (and you might not need to read further). However, if you're here, it's possible that you either haven't enlisted the services of a financial advisor or prefer to invest based on your own convictions, am I right? Then read the previous articles and come back. 

Welcome back after your exploration of our previous articles. It's crucial not to rely solely on others' recommendations when it comes to investing, as building your own conviction in the funds you choose can lead to successful long-term investments. I trust you've grasped the art of selecting the best mutual funds from our earlier articles. Now, let's delve into the web portals we can utilize to analyze these funds.

• ET Money
• Morningstar.in
• Investonline.in
• Advisorkhoj.com
• Bmsmoney.com

Greetings, Esteemed Readers,

In our ongoing series, we have covered five parts thus far. In this installment, we will delve into the practical application of the procedure discussed in our previous article (Part-5). However, before we jump into the practical aspect, let's take a moment to recap the essential checks:

• Define our financial goal.
• Determine our risk appetite.
• Utilise these steps to choose the right fund category.

Once we've accomplished these initial steps, we can move on to more specific sub-checks for selecting a fund within our chosen category. These sub-checks include:

• Assessing the age of the fund.
• Analysing the fund's Assets Under Management (AUM).
• Reviewing the fund's performance over various time periods.
• Evaluating the fund manager's expertise and their duration of association with the fund.
• Examining ratios and metrics in comparison to its peers.

Now, let's roll up our sleeves and dive into the practical session 😊. 

To illustrate, let's assume my financial goal is "wealth creation," which is a long-term objective, and my risk appetite is on the higher side. Consequently, I have decided to invest in the "Small Cap Fund" category.

Within this category, there are numerous funds available from various Asset Management Companies (AMCs). Our first task is to organise these available funds based on their "age of fund.”

I utilised the "ETMoney" website to filter the funds, resulting in a selection of 19 funds with over 3 years of operational history. Further refining by Assets Under Management (AUM) size, we arrived at a list of 11 funds:

• Quant Small Cap Fund Direct Growth
• Canara Robeco Small Cap Fund
• ICICI Prudential Small Cap Fund
• Tata Small Cap Fund
• Aditya Birla Life Small Cap Fund
• Invesco India Small Cap Fund
• Sundaram Small Cap Fund
• Edelweiss Small Cap Fund
• Bandhan Emerging Businesses Fund
• Union Small Cap Fund
• Bank of India Small Cap Fund

Next, we'll compare the performance of these 11 funds against the category average return. This analysis will help us identify the most promising options for our investment strategy.

You can compare these Year wise in morningstar.in as like below. 

*it is of “Quant Small Cap Fund”.

After a thorough comparison with the category average, the following funds have shown better performance:

• Quant Small Cap Fund
• ICICI Prudential Small Cap Fund
• Sundaram Small Cap Fund
• Edelweiss Small Cap Fund

Now that we have narrowed down our selection, it's time to delve deeper and compare these four funds based on various ratios and metrics (Alpha, Beta, R2, Sortino, Sharpe, Upside capture ratio, Downside Capture ratio, Standard deviation, Expense Ratio and Turn over Ratio) to make a more informed investment decision.

*Source: morningstar.in

I trust that you have thoroughly reviewed the explanations of the aforementioned ratios in the prior articles (Part-3 and Part-4) and have a clear understanding of them. If not, I recommend revisiting those sections repeatedly until you feel confident in your comprehension.

Now, let's turn our attention to the table and evaluate the metrics of the funds in comparison to the category average. Please proceed to share your selection of the fund based on this metrics comparison in comments below.

To streamline this process, it would be beneficial to provide a ranking based on the individual ratios

Based on the comparison of these metrics, here's an assessment of the two top-performing funds:

• Quant Small Cap Fund:
• Generates higher returns but with high volatility.
• Exhibits a high expense ratio (1.78%) primarily due to a high turnover ratio.
• Generates a significant alpha of 9.83 despite the expense ratio.
• ICICI Prudential Small Cap Fund:
• Also generates higher returns (though slightly lower than Quant) with less volatility.
• Maintains a lower expense ratio compared to Quant Small Cap.
• Shows strong performance with relatively lower downside risk.

* And we need to see present fund manager association with these funds. 

Quant Small Cap:  

ICICI Prudential Small Cap: 

Considering these factors, the choice between these two funds depends on your risk tolerance and investment objectives:

• If you are comfortable with higher volatility and are seeking potentially higher returns, Quant Small Cap Fund could be the choice due to its higher alpha. (Higher expense ratio is due to higher turn over ratio).
• On the other hand, if you prefer a balance between returns and risk, and wish to minimize expenses, ICICI Prudential Small Cap Fund may be a more suitable option.

Ultimately, the decision should align with your personal financial goals, risk appetite, and investment horizon. 

I hope you understand it will, Kindly share your selected fund along with the reasons supporting your choice in the comments section below.

Greetings, dear readers! Welcome to the fifth and most pivotal instalment of our "Investing in Mutual Funds" series. Think of this segment as our grand finale. In the vast landscape of mutual funds, how do we navigate and select those that align perfectly with our financial objectives and risk tolerance?

Selecting mutual funds is no cookie-cutter task; your choices should be as unique as your financial circumstances and objectives. Armed with the right information and a strategic approach, you can make well-informed decisions that set you on the path to financial prosperity.

In our previous articles, we delved into the essential terminology and key performance ratios used in the world of mutual funds. In this segment, we'll transition from theory to practice, learning how to leverage these terms and ratios in the selection of funds that best match our financial goals and risk appetite.

This article aims to be your compass in the complex landscape of mutual fund selection. Whether you're a novice investor looking to start your investment journey or an experienced one seeking to refine your portfolio, we're here to guide you through the decision-making process.

so, whether your goals involve retirement planning, saving for a child's education, or simply seeking to grow your wealth, let's embark on this journey together to uncover the art and science of choosing the right mutual funds for your financial future.

But before we dive into the practicalities, let's rewind the key terms and ratios discussed in our previous articles (Part-1, Part-2, Part-3 and Part-4).

Now, let's embark on the exciting journey of mastering the art of investing in mutual funds! 😁

For the purpose of illustrating our selection process, we'll use the "Quant Small Cap Fund" as our reference. Please note that this fund is not recommended by us.

To select any Mutual fund, the initial step is to define our investment objective and clarify the purpose behind our investment. Whether it's for retirement planning, education funding, home purchase, or any other financial goal, setting a specific time frame for achieving, is crucial.

For Short-Term Goals: In cases of short-term goals or emergency funds, consider money market funds or debt funds. These options offer stability and liquidity. They primarily invest in low-risk, highly liquid securities such as Treasury bills, government securities (G-secs), and bonds.

For Long-Term Goals (More than 5 years): For long-term objectives like retirement planning or wealth accumulation, it's wise to explore equity funds. These can encompass various types, including index funds, actively managed stock funds, and sector-specific funds.

Now, let's delve into the selection of equity funds. Equity funds tend to offer higher returns, albeit with higher risk, which often appeals to retail investors seeking substantial gains. However, within the realm of equity funds, there are different categories, such as Large Cap, Mid Cap, Small Cap, Sectoral/Thematic, and ELSS (Equity-Linked Savings Schemes), as we discussed in our previous article (Part-2).

To choose among these categories, it's essential to assess our risk tolerance. You might wonder why we need to evaluate risk when equity funds inherently carry a high level of risk. The reason is that risk tolerance varies among individuals, and understanding your comfort level with risk is key.

Consider how much risk you are willing to take with your investments. Generally, risk and potential returns are closely linked. Higher risk tolerance may offer the potential for greater gains, but it also carries the potential for more substantial losses. Therefore, careful consideration is essential at this stage of decision-making.

Here's a general guideline for risk levels within equity funds:

• Large Cap/ELSS funds tend to be more stable.
• Mid Cap funds are moderately stable.
• Small Cap funds come with higher volatility.
• Sectoral/Thematic funds require a deeper understanding of specific sectors, in addition to other evaluation criteria.

So, have you selected the type of fund that aligns with your goals and risk tolerance? If so, the critical part of the process has just begun.

Once you've identified the fund category that aligns with your objectives, you'll encounter numerous options offered by various Asset Management Companies (AMCs) falling under the same category. This is where the real work begins – selecting the fund within an AMC that consistently outperforms its peers from other AMCs.

Here are the criteria I've used to select a fund within the category we've chosen. (It's worth noting that I always recommend opting for the "Direct" option due to the differences between Direct and Regular, as explained in Part-2.)

• Age of Fund: Consider the tenure or age of the fund. A longer track record can provide insight into how the fund has performed through various market cycles. I think, opting for a fund with a minimum age of 3 years is a wise decision.

• Fund's AUM (Asset Under Management) / Size: The fund's AUM is an important factor. A fund with a substantial AUM may offer stability but could face challenges in deploying large amounts of capital effectively. Conversely, a small fund may be more nimble but might have liquidity limitations. So go for medium sized fund (500 Cr to 10000 Cr). 

• Fund Manager Expertise: Assess the fund manager's experience and track record. A skilled and experienced fund manager can play a crucial role in a fund's performance. The duration of their association with the fund is also a crucial factor to take into account. When a fund exhibits strong performance but experiences a recent change in the fund manager, it raises questions about the likelihood of maintaining that performance. 

• Fund Performance Over Different Periods: Examine how the fund has performed over various timeframes, such as short-term, intermediate-term, and long-term, in comparison to its peers. Consistency in performance is key. Compare on time-frames like 1M, 3M, 6M, 1Y, 3Y, 5Y etc.,

• Ratios/Metrics Compared to Peers: Analyse key ratios and metrics of the fund, including expense ratios, Sharpe ratios, alpha, and beta, (refer Part-3, Part-4) in comparison to similar funds offered by other AMCs. These metrics provide insights into the fund's efficiency and risk-adjusted returns.

By considering these factors and conducting thorough research, you can make an informed decision when selecting a specific fund within your chosen category. Remember that past performance is not indicative of future results, so ongoing monitoring of your investments is essential.

Let's conclude here to keep this segment concise. The detailed illustration of the fund selection procedure outlined above will be covered in our upcoming article. We appreciate your patience and encourage you to stay with us to gain practical insights into the process. 

Share your selection of fund as per your financial goal and risk appetite in comments below.  🙏