I have read several books and articles on mutual fund selection and i made it my goal to gather the criterias that help in picking good MF. Please note below criterias only assist in putting the probabilities in one's favour but does not guarantee outperformance. I welcome any kind of feedback/suggestion.
Define objective of investment, then consider time horizon and risk appetite.
Decide your allocation for equity & fixed income investment based on above criteria and your age.
Also decide your allocation for different mkt cap within equity based on above criteria – generally limit to 25-35% to mid/small cap allocation – use valueresearch portfolio analysis or Morningstar x-ray tool to know your overall portfolio allocation by market cap
Primary criteria:
Ensure a fund has existed for minimum 8-10 years –to ascertain performance across different market conditions
Returns:
Ensure Rolling returns has beaten category average/ benchmark for 3, 5, 10 year period – rolling returns available in several sites like advisorkhoj, etc
Calendar year returns – ensure calendar year returns mostly cross benchmark or category avg to ensure only a few years return did not lift overall returns
Fund manager:
Ensure fund manager has managed fund for atleast 5 years. slightly more preference to the fund where fund manager has been manging the fund for long time.
Majority of funds managed by fund manager should atleast beat benchmark/peers.
Insider investment: fund manager should have invested atleast 2.5 cr in fund or in one of the other fund he manages - to ensure fund manager’s interests are aligned with shareholders interests and he believes in his investment process – this info is available in SID in aggregate investment column
Qualitative analysis:
Does fund have a clear and well defined investment strategy and does it consistently stick to it regardless of changing conditions?
Is AMC is process oriented or dependent on fund manager? - these qualitative info is not easily available to retail investors. So I rely on Morningstar website’s analyst opinion (free) and primeinvestor website (paid) for these info
AMC:
Ensure majority of the equity funds of AMC perform well – this criteria refers to management culture and if AMC is process oriented – check this from morningstar site analyst view on AMC or valueresearch site
Secondary criteria:
AUM:
Ensure a fund has atleat 1000 cr in AUM – so that AMC takes the fund seriously and deploys one of best managers to manage it
Maximum fund size for a Rs 20,000 crore for a multi cap fund but depends on fund allocation across different cap. Rs 10000-15000 crore for a small cap fund, Rs 22000 crore for mid cap fund, large cap fund is 40,000 crore – sometimes, fund performance is known to take a hit when AUM crosses this limit.
Ratios:
percentage of times a fund has beaten benchmark & peers is probably the best ratio to use for future performance indicator – available in primeinvestor site (paid subscription), I am not aware of other sites with this ratio
Check for higher sharpe ratio among the chosen funds (though sharpe ratio may be low for mid and small cap funds performing well due to higher volatility) – predicts risk adjusted returns
Some people give importance to low expense ratio and low turnover ratio as expenses and trading costs/taxes associated with frequent churning of portfolio can sometimes be as high as 4-5%
Limit the investments to 1 or 2 focused funds as wrong calls by fund manager can have disastrous effect. Avoid funds with huge concentration in few sectors.
Define objective of investment, then consider time horizon and risk appetite.
Decide your allocation for equity & fixed income investment based on above criteria and your age.
Also decide your allocation for different mkt cap within equity based on above criteria – generally limit to 25-35% to mid/small cap allocation – use valueresearch portfolio analysis or Morningstar x-ray tool to know your overall portfolio allocation by market cap
Primary criteria:
Ensure a fund has existed for minimum 8-10 years –to ascertain performance across different market conditions
Returns:
Ensure Rolling returns has beaten category average/ benchmark for 3, 5, 10 year period – rolling returns available in several sites like advisorkhoj, etc
Calendar year returns – ensure calendar year returns mostly cross benchmark or category avg to ensure only a few years return did not lift overall returns
Fund manager:
Ensure fund manager has managed fund for atleast 5 years. slightly more preference to the fund where fund manager has been manging the fund for long time.
Majority of funds managed by fund manager should atleast beat benchmark/peers.
Insider investment: fund manager should have invested atleast 2.5 cr in fund or in one of the other fund he manages - to ensure fund manager’s interests are aligned with shareholders interests and he believes in his investment process – this info is available in SID in aggregate investment column
Qualitative analysis:
Does fund have a clear and well defined investment strategy and does it consistently stick to it regardless of changing conditions?
Is AMC is process oriented or dependent on fund manager? - these qualitative info is not easily available to retail investors. So I rely on Morningstar website’s analyst opinion (free) and primeinvestor website (paid) for these info
AMC:
Ensure majority of the equity funds of AMC perform well – this criteria refers to management culture and if AMC is process oriented – check this from morningstar site analyst view on AMC or valueresearch site
Secondary criteria:
AUM:
Ensure a fund has atleat 1000 cr in AUM – so that AMC takes the fund seriously and deploys one of best managers to manage it
Maximum fund size for a Rs 20,000 crore for a multi cap fund but depends on fund allocation across different cap. Rs 10000-15000 crore for a small cap fund, Rs 22000 crore for mid cap fund, large cap fund is 40,000 crore – sometimes, fund performance is known to take a hit when AUM crosses this limit.
Ratios:
percentage of times a fund has beaten benchmark & peers is probably the best ratio to use for future performance indicator – available in primeinvestor site (paid subscription), I am not aware of other sites with this ratio
Check for higher sharpe ratio among the chosen funds (though sharpe ratio may be low for mid and small cap funds performing well due to higher volatility) – predicts risk adjusted returns
Some people give importance to low expense ratio and low turnover ratio as expenses and trading costs/taxes associated with frequent churning of portfolio can sometimes be as high as 4-5%
Limit the investments to 1 or 2 focused funds as wrong calls by fund manager can have disastrous effect. Avoid funds with huge concentration in few sectors.
