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Choosing the Right Mutual Fund | Part 2

By Fateen Tahseen Alam

Analyst

EDGE AMC Limited

Posted on: 24 Dec, 2023

Determinants like risk appetite and the long-term plan will help narrow the focus, they alone are not enough for fund comparison, as similarly designed multiple funds are present in the market but won't necessarily represent the same quality in terms of performance and accountability.

The following indicators will help guide you in deciding between funds—

• Owners: The track record and experience of the owners of the operating asset management company will determine how trustworthy a mutual fund's operations are. The cleaner and more successful the owners' track record, the more likely their mutual funds will produce good results through a dependable operation. Of course, when comparing, an ethical track record takes precedence over performance.
  Management Team: The management team's expertise and experience are linked to the likelihood of good mutual fund performance. A competent decision-making team with ethical grounding will support good performance.
  
• Return History: The return history of a mutual fund or asset management company reflects the fund managers’ efficacy and consistency. To get an accurate picture of a mutual fund, it’s important to compare its historical performance with that of other funds within the same category in the local industry. Aside from growth, it's also useful to consider how much less or more a fund has lost in comparison to its peers during down-trending periods.
  
• Fees & Expenses: An important but often overlooked indicator is the fee. Fees must be considered in the evaluation process because extremely high fees can eat into even good returns, making them less attractive. Ideally, mutual fund fees are in the range of 0.5%–2%.
  On the expense side, the expense ratio, which is obtained by dividing total fund operation costs by total fund assets, can show you how efficiently funds are managed. Usually, an expense ratio higher than 1.5% is considered high.
• Reporting: An important indicator of accountability is the NAV calculation, the auditing of financial statements, and the reporting frequency.
  • It’s important to check whether the NAV calculation is supported by market fundamentals.
  • Another thing to check is if the financial statements are routinely audited by reliable auditors and whether timely mandatory financial disclosures, e.g., quarterly reports, annual reports, portfolio statements, etc., are made.

Read Part 1 here.

You may read this post on how to invest in mutual funds if you're someone looking to start investing.

To learn more about mutual funds, you may read our guide on mutual fund investing.