Mutual Fund Investment: Pivotal factors to consider when choosing the fund for long-term growth, is it good to track past performance?

Are you planning to begin mutual funds investment or systematic investment plan (SIP) and researching funds that have the highest returns in recent years or historically? This strategy may not be beneficial or may be bad for your investment journey. Then how  to choose the fund; here's what the experts say:

Mutual Funds are an option in which investors can easily diversify their investments, and one can hand over their hard earned money to reap better returns to qualified fund managers. To choose the best fund for the highest returns they (investors) should ensure two factors during selection.

Here are the two factors to consider while investing in MFs

1. Qualitative Factors

2. Quantitative Factors

According to Jiral Mehta, Senior Research Analyst at FundsIndia said investors should look at several quantitative and qualitative factors when evaluating a fund.

"These fund factors include, consistency in performance and investment philosophy, risk management, a good fund manager with a long-term track record, etc," she added.

Apart from these factors, investors should also look at several factors, including risk appetite, diversification categories, fund managers, and Assets Under Management (AUM).

"To begin with, they (investors) should evaluate if the fund is matching their risk appetite," said Abhishek Tiwari, Executive Director & Chief Business Officer, PGIM INDIA MF.

Furthermore, after this, investors should look at funds that have a diversified investment mandate, categories like flexi Cap and multi cap are designed to invest across market capitalization.

"They should look at the fund house pedigree, fund manager’s style, rolling returns over a longer time frame, assets under management, among others. Fund houses who have a well-defined investment process lend themselves to overall consistency in performance over a longer period of time, which becomes important for investors looking for core allocation." Tiwari added.

How are these two factors beneficial to choose the Mutual Funds?

Qualitative factors of the fund include fund house reputation, fund manager’s experience in markets, and fund manager’s style, among others. On the other hand, quantitative factors include performance and risk metrics.

Tiwari explained that quantitative and qualitative factors can play pivotal roles when choosing a fund; here's how:

Fund Manager: The manager’s experience and style can play a pivotal role in the performance of the fund, those who have a high-growth high-quality style of investment management have underperformed their peers in the recent past while those who follow a value-oriented investment style have outperformed.

They also should evaluate a fund manager’s track record of managing funds across different market cycles. The longer the experience the better. Different styles play out during different market conditions.

Diversification: Investors should consider including funds from different asset management companies and fund managers to get the benefit of diversification. They should hold a mix of funds that follow different styles – growth, value, and momentum.

Sharpe Ratio: Another widely used measure for evaluating mutual funds is the Sharpe Ratio, which helps you understand the risk-adjusted performance of mutual funds.

Standard deviation can help investors understand how volatile a fund is compared to the benchmark.

However, quantitative factors should not be looked at in isolation, says Tiwari.

Is tracking the past performance of funds a good practice?

Majorly, the experts have suggested that monitoring the fund returns is not considerable, if you want to do then here's a condition:

Abhishek said when choosing an equity fund, ideally, investors should look at rolling returns over a five or seven year time frame. Active funds are meant to outperform their benchmark. So evaluating the fund for its benchmark and peer group is essential.

"Due to kind of investment styles, market cap segments, sectors, and geographies in different conditions, basing the selection of funds solely on returns does not work well over long periods of time," Jiral said.

While past performance is no guarantee of future returns, it is essential to look at fund performance over different market cycles.

At the end, it is also extremely important and critical to be able to map your own investment personality and then diversify risk systematically by marrying different styles of investment to arrive at the most suitable investment portfolio and in turn potential outcome.