Is it right to take funds only by looking at past performance? What are the disadvantages of choosing a fund based on historical performance? What is the right way to choose a fund? What to keep in mind while choosing a fund? 

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Zee Business News anchor, Swati Raina in the show ‘Money Guru’ spoke to Mohit Gang, Co-Founder & CEO of Moneyfront to understand the key ratios of selecting a fund and the right way to choose it. 

Moneyfront is a Fintech firm.
 
What are the disadvantages of choosing a fund based on its historic performance? 

Most commonly, the retailer and investors check the last one-year performance of the fund and invest their money where good returns were seen. In my opinion, this is the wrong method of investing. 

In fact, if we acquire this method for our portfolio then we may get a reverse return.

The right way to choose a fund is to look at the scales like fund house pedigree, track record of the fund manager, AUM, expense ratio. Apart from these softer facts, we also have to look at the critical factors which are also called key ratios. These key ratios include Better Performing Scheme, Downside protection, Risk cover, Standard Deviation.  

Checking the historical performance of a fund is one of the key ratio. But this is not the be-all and end-all of selecting the fund.  

What are the parameters and criteria for selecting a fund? 

Mutual Fund is like a coin with two sides, return and risk. We can cross-check the return by seeing the past history but for the risk side, we have to look at some key ratios. These key ratios include: 

  • Alpha 
  • Beta  
  • Standard Deviation  
  • Sharpe ratio   
  • Sortinoff ratio 

These five ratios show the equation of risk and return of the fund. 

Describe Alpha, Beta, Standard Deviation, Sharpe Ratio, and Sortinoff ratio? 

The basic definition of Alpha is how well a fund manager has outperformed his/her benchmark.  

Beta shows how much the fund is volatile or how much fund deviates from its benchmark. 

Standard Deviation is also a method to measure the volatility of the fund. The difference in beta and standard Deviation is beta represents sensitivity movement of funds whereas standard deviation is a hard number. 

With the passage of time, different ratios come in the market that totally depends on the risk, and Sharpe and Sortinoff are two of them. These ratios also help to measure the risk in a different manner.”   

Where the investors will get these key ratios: Alpha, Beta, Standard Deviation, Sharpe Ratio, and Sortinoff ratio? 

These ratios are easily available in different independent websites like Money Control, Value Research, Investing and many more but most importantly these numbers are available in the fund house fact sheets websites.   

But I request all the investors that single criteria will not justify any scheme. The combined weightage of risk and return ratios will help you to choose the perfect Scheme.

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