My recommendation for the best mutual funds available in India are at the end of the post. However, let us start with understanding the key risk indicators in mutual funds.
Most investors look at 3 year, 5 year or 10 year returns when choosing a mutual fund. However, not a lot of people understand the risk indicators associated with mutual funds.
Key risk indicators
Following are the are four key mutual fund risk indicators which one should use along with historic returns to pick the right mutual fund:
- Standard Deviation (SD): It tells how much the fund’s return can deviate from the historical mean return. For example, if a fund has a 12% average rate of return and a S.D. of 4%, its return will range from 8-16%.
- Sharpe Ratio: It measures how well the fund has performed vs the risk taken by it. Higher the Sharpe Ratio, the better the fund has performed in proportion to the risk taken by it.
- Alpha: It is the excess return of a fund compared to its benchmark index. Suppose, a fund is expected to earn—based on its beta—a return of 15 per cent in a given year. However, it actually fetches you 18 per cent. Then the alpha of the fund is simply 18 – 15 = 3. Alpha can be seen as a measure of a fund manager’s performance. Because this is what the fund has earned over and above (or under) what it was expected to earn.
- Beta: It measures fund’s volatility compared to that of a benchmark. It tells you how much a fund’s performance would swing compared to a benchmark. A fund with a beta of 1 means, it will move as much as the benchmark. If a fund has a bet of 1.5, it means that for every 10% upside or downside, the fund’s NAV would be 15% in the respective direction
How to evaluate a mutual fund?
You can get values of all the above indicators from Morningstar.in for mutual funds. I have done evaluations of a few mutual funds basis the risk indicators, returns and assigned a weightage to these factors to come up with a final colour rating. Green means invest, Yellow means keep a check if already invested, and Red means stop. Darker the shade of green better the mutual funds risk reward profile.
You can download my sample evaluation by clicking here. Some of the colour indicators are subjective, but it provides an idea on how you can do this for yourself. All of these are direct mutual funds, if you are investing via a distributor you can easily downgrade each of them by one shade. Typically, distributors will take away 1-1.5% of the returns.
Best mutual funds in India
Following are the best equity mutual funds that I have selected basis my assessment as on Feb 2019
- ICICI Prudential Banking and Financial Services Direct Growth (Category: Sectoral Banking).
- Mirae Asset Emerging Blue Chip Fund Direct Growth (Category: Large and Mid-cap).
- HDFC Small Cap Fund Direct Growth (Category: Small-Cap).
- Mirae Asset India Equity Fund Direct Growth (Category: Multi-Cap).
- Axis Bluechip Fund Direct Growth (Category: Large-Cap).
- Tata Equity P/E Fund Direct Growth (Category: Value oriented).
- Aditya Birla Sun Life Frontline Equity Fund Direct Growth (Category: Large-Cap).
- Franklin India Prima Fund Direct Growth (Category: Mid-Cap)
Disclaimer: I do have positions in some of the mutual funds mentioned above.