Best Tips to do an Analysis of Mutual Funds

Before investing in mutual funds a proper analysis is required. While all analyses’ efforts are aimed at maximizing returns and minimizing risks, it is the latter that gains importance as the single most fundamental criterion to compare mutual funds. This article makes you aware of:

  • How can you do a mutual fund analysis?
  • important is the risk factor analysis?
  • Why is it important to track the record of mutual fund companies?

Investing in mutual funds is not a child’s play unless one does a mutual funds’ analysis. At least it is not as easy as picking top performers going by indices and investing in them. While all analyses’ efforts are aimed at maximizing returns and minimizing risks, it is the latter that gains importance as the single most fundamental criterion to compare mutual funds.

Fundamental Objectives of Investment

To begin with mutual funds’ analysis you need to be clear about the investment objectives you have, that is whether the objective is growth of capital or regular income. Whatsoever be the case, the basics of

Tips To Do Mutual Fund Analysis

It is needless to say that you need to have some rudimentary knowledge of investing in stocks and securities apart from street smartness to research mutual funds. Here are a few tips for analysis before investing mutual funds. We will begin our exercise from the point you have collected all the relevant information about competing funds.

Look At The Portfolio of Your Pick of Funds

Most of the plans will have invested in multiple stocks or securities for diversification. Critical point here is in what proportion they have invested in different stocks. Giving a higher weight age to a high returning stock leaves less opportunity for broader allocation and may back fire when market is bearish (plummeting steadily). Also higher returning stocks carry high element of risk.

The Optimum Portfolio Size

What should be the optimum portfolio size (assortment investments under one plan) for your pick of fund? Well, opinions are divided about this, but it is crucial to look into the specifics of stock bets and sectors you will be exposed to. Higher exposure to specific sectors may see you loosing out on broad based rallies in the bourses (stock markets). Optimally 65 % to 85% may be allocated in stocks from different sectors for diversification plus growth and the balance being in typical bond and money market instruments.

Is Your Pick of Funds Really Diversified

Notice that the competing plans, though from different fund companies, perform almost on par as if they have a correlation. They indeed have. So, does it mean you have diversified by spreading your money amongst them? Well, think again. Similar plans have similar pattern of their holdings of stocks and with a similar portfolio. This means, in actual effect you are not diversifying. They all go up and down almost as if they do it in tandem. For clear diversification, pick those with different portfolios though they are similar plans (ex: growth, index or dividend paying etc).

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