How to select the correct mutual fund for 2025? What should you consider when choosing a mutual fund?

Some things to keep in mind when investing in mutual funds: If you have no experience with mutual funds, it is better to invest in mutual funds with the advice of a qualified advisor

Now, we will see what things should be focused on before investing in funds.

Benchmark VC fund performance
Risk-o- meter
Beta
Alpha
Rolling return
Annualized return
Profit Earning Ratio
History of fund house
Expense ratio
Performance of fund manager

Now, we will briefly discuss these points.

Benchmark vs fund performance:

What is the benchmark?

The benchmark is the standard index for fund performance; if fund performance is greater than the benchmark, the fund manager is doing the fund very well.

Some commonly benchmark Indexes:

Nifty 50

BSE SEN SEX

Nifty midcap 100

Nifty small cap 100

Nifty 500

Nifty next 50

Nifty Bank

Benchmarks have standard protocols and specific marks. If the fund outperforms the benchmark, it will get good returns.

Example:

If the benchmark return is 14% and the fund performance is 16%

👇

The fund is performing well.

If the benchmark return is 16% and the fund performance is 14%

👇

The fund is performing poorly.

Table of Contents

Risk-o-meter

A mutual fund is a tool created by the securities and SEBI to help investors understand how risky different mutual funds are. It shows the level of risk for each fund.

👉 There are six different categories of risk:

1) low risk, low to moderate risk, moderate risk, moderate high risk, high risk, very high risk.

2) The risk-o-meter is a crucial tool for investors to assess the risk associated with a mutual fund and make informed investment decisions.

BETA

Market movement related to fund sensitivity. Beta measures how much a mutual fund’s return moves about the market.

For example, if a benchmark index, such as the Nifty50 or BSE Sensex, has a beta of 1, and if a mutual fund has a 1, the fund’s return moves in the same direction as the benchmark.

👉 Beta helps investors understand the risk associated with mutual funds.

👉 Higher beta indicates higher risk and potential for higher returns, while lower beta indicates lower risk and more stable returns.

How to calculate beta?

1) chose a market benchmark using a common market index like the S&P 500 to represent the overall market.

2) collect returns date get past returns for both the mutual fund and the market index over the same period (daily/weekly)

3) calculate the returns and figure out the percentage change in both the mutual fund and the market index.

4) calculate the covariance and variance to find Beta the following formula used.

covariance of the fund market

Beta: ____________________________

Variance of the market

ALPHA

A positive alpha indicates that the fund outperformed its benchmark.

Example- an alpha value 2 indicates that the fund outperformed its benchmark by 2%.

Negative alpha: Negative alpha indicates that the fund underformed its benchmark.

For example, an alpha value of 1 indicates that the fund outperformed its benchmark by 1%

Rolling return

Rolling returns measure the average annual returns of a mutual fund over a specific period, calculated continuously over different intervals. This method provides a comprehensive view of a fund’s consistency and performance across market cycles. It is particularly useful for assessing volatility and long-term trends.

Instead of looking at one-time specific periods, rolling returns calculate coverage returns for overlapping periods; for example, to find 3-year rolling returns over 10 years, you would calculate the return for 6 3 years. Move forward by one month and calculate the next three 3 years’ return. Keep doing this until you have covered the whole 10 years.

👉 Example- let’s say mutual fund had these annual over 5year.

Year 1= 10%

Year 2= 12%

Year 3= 8%

Year 4= 15%

Year 5= 9%

👉 for the first 3year (year 1- 3year)/, the averag return is

10%+12%+8%

______________ = 10%

👉 for the next 3 years (year 2 to year 4), the average return is

12%+8%+15%

_______________ =11.67%

👉 for the last year (years 3 to 5), the average return is

8%+15%+9%

_______________ =10.67%

Annualized return

Annualized return is a way to show how much a mutual fund grows each year on average over a certain period, including the effect of compounding. It helps in comparing different investments more easily, even if they are for different time lengths.

Example:

If you invested Rs.10,000 in a mutual fund and it grew to Rs.12,000 in one year, the annual return would be.

(Rs.12.000-Rs10,00).Rs-10.000*100=20%

Profit Earning ratio

The profit-earning ratio (P/E ratio) tells you how much investors are willing to pay for each dollar of profit a company or mutual fund makes. It helps investors decide if the fund or the stocks it holds are priced too high or too low compared to the profit they generate.

How to calculate the earning ratio

price of one unit (or share)

P/E ratio= ___________________________

Profit made one unit.

History of fund house

The history of fund performance can be checked in the following ways.

👉 Check the return of the fund over various periods- 1 year,3 years,5 years, and since its start

👉 Compare the fund performance to its benchmark index. (like the Nifty50 or Sensex) to see if it outperformed or underperformed.

👉 Check the risk level of the fund and understand how the fund responded to market volatility.

👉 Check the performance of the fund during major economic events (example: 19 pandemic)

👉 Check the risk-adjusted returns of the fund, that is, the Sharpe ratio.

Sharpe ratio formula: Sharpe Ratio = (Investment Return – Risk-Free Rate) / Standard Deviation

Expense ratio

-According to the rules, the fund expense ratio that exists today will not remain the same after five years. As per SEBI rules, the expense ratio will continue to decrease as the size of the fund increases. Here, a maximum of 2.4% expense ratio is charged.

Performance fund manager

A mutual fund manager’s primary role is to manage a mutual fund’s portfolio, making investment decisions (buying and selling securities) to achieve the fund’s objectives and maximize returns for investors while managing risk. Moreover, you can visit the Money Control Pro website to know about the performance of the fund managers of all the fund houses.

Conclusion

Keeping all these things in mind, it is better to invest in mutual funds. If we do not have any experience, it would be better to invest with the advice or help of a fund manager. In this case, we invest through an application App, and our family may not be informed about this investment. But if we invest with the advice of a fund manager, he will provide all the investment fund -related help to our family members in our absence.