With each fund category offering so many products, how do you select the right one for your client?
The Indian fund industry offers thousands of mutual fund schemes. In fact, each scheme category i.e. equity, debt, balanced, ETF etc.has scores of products. This makes the job of selecting the right products for their clients difficult. Here are five points that will help you overcome this problem:
Age of Fund: Track record of an older fund is easily available and can be studied. You will not only have the NAV history, you will know about the consistency in investment approach, resilience through good times and bad, etc. It is difficult to predict the future performance of newfunds as there is no track record to go by.
Scheme expense ratio: Advisers need to be careful about expense ratio of the funds.Not only is the performance of certain categories of funds such as debt and index funds sensitive to expense ratio charged, even in actively managed fundsa higher expense ratio can impact the amount in an investor’s pocket.
Consistency in performance of Fund Managers: A Fund Manager’s expertise in security selection, portfolio construction, entry and exit timing play a pivotal role in the final outcome. His/her ability to deliver results across schemes over a few market cycles needs to be ascertained.
Sharpe Ratio: Mathematically, the measurement of Sharpe Ratio is based on standard deviation, risk free returns and expected return earned by the performance of fund. It is also one of the important indicators of fund’s performance vis-à-vis the risk taken by a fund manager. Higher the value of Sharpe ratio, better the scheme. Sharpe ratio can be easily calculated in excel sheet.
Pedigree of the Fund House: Advisers should keep in mind the track record of a fund house, risk management techniques and its system and processes while selecting a fund. If a fund house is too dependent on its star Fund Manager, it is a matter of concern.