How to choose the best mutual fund?

As we move further, let me clarify that best mutual fund is all about the best suited to your risk profile and goals not that it is best in returns. 

I have seen many of my friends make this mistake of choosing mutual funds solely on the recent performance of the fund. 

Some consider the rating given by various sources. these star ratings should only be one of the factors to look at, there are so many more parameters that one should be aware of before finalising a mutual fund portfolio. 

Here are some of those parameters.

1.  Performance Ranking: To find out the ranking you need to check out the quartile ranking which will show the performance through the quarter to quarter among its peer group. 

Quartile comprises of 25 per cent of peer group schemes. So one should select the scheme which has been on top quartile most of the time. 

If the scheme is going below 3rd quartile in a couple of consecutive quarters, you should exit. you can find these ranking from mutual fund research websites.

2.  Ratio analysis: Along with the risk ratio and return ratio, one should also look for the ALPHA of the fund. it means that alpha is the performance ranking of the fund manager. 

It tells us what extra or fewer fund managers has generated out of a given portfolio in the comparison to the benchmark. you can check how often the fund manager has generated positive alpha in the last quarter and keep a watch on its consistency.

3.  Total expense ratio: you need to check the expense ratio. it is a very important parameter while selecting any mutual fund scheme. 

All fund management and distribution-related expenses are borne by the scheme. that means high expense ratio will affect the fund's returns. Though mutual fund's total expense ratio is checked by SEBI, still lower, the better.

4.  Fund manager tenure and experience: Fund manager plays a very important role in the fund's performance. a fund manager is the one who makes the ultimate decision so it doesn't matter if its a process-oriented approach. 

one should be aware of the fund manager of the scheme and what is his past track record. you should compare the performance with other funds which he is managing if the fund manager of the scheme has recently been changed, don't worry. 

just keep aware of his performance by looking at alpha and quarter to quarter performance.

5.  Scheme asset size: Parameters are different for debt and equity schemes. Inequity comfortable asset size in hundreds of crores, in debt it should be in thousand of crores as the investment value per investor. Asset under Management (AUM) consist of 90% of the mutual fund industry are invested in debt funds, so you selected scheme assets should also have a considerable AUM. 

Low AUM in any scheme is very risky as you don't know who the investor is and what quantity of investments they have in the schemes. the mutual fund gets severely impacted its overall performance when any big investor exits and remaining investor have to suffer. 

You must observe that all the above-mentioned parameters are connected in some way or other. a good fund manager will take care of the quartile ranking and generate good alpha which will automatically result in better performance.