How to select mutual funds beyond star ratings

   2021-04-27       6        Finance
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Investors should not blindly follow star ratings as they could mislead. Investors usually go about searching for the top-performing mutual funds and look for ratings to evaluate the best mutual fund.

Why should you not only depend on ‘Mutual Fund Ratings’?

  • It is essential to look beyond rating for various types of mutual fund schemes. Investors need to consider the following factors:

1)      Evaluate the financial health: An investor must thoroughly perform due diligence on his investment’s financial health

2) Portfolio composition: Investors also need to check the portfolio components, sector allocation, the credibility of government papers in different types of mutual funds he is looking to invest.

3) Cash level: Fund Managers adjust the cash level in their portfolio depending on the prevailing liquidity requirements and portfolio changes due to market cycles. If the equity markets are rising, they trim their respective allocations to keep a higher portion in cash and reduce the cash level during a falling market. Therefore, it is advisable not to blindly follow star ratings for various types of mutual fund schemes.

  • It is not wise to judge several types of mutual fund schemes based on star ratings, as they can also be subject to market risks. . Always remember high returns and high risk goes hand in hand.
  • In a nutshell – Yes, one can consider ratings for different types of mutual fund schemes to reduce the time on research, but this should not be one of the most important factors to consider while choosing a mutual fund.

Here are six factors to consider when choosing different types of mutual funds schemes in India beyond the best star rating funds

1.       Goals – While investing in a mutual fund or several other types of mutual fund schemes, one must choose its goals in terms of the time period, returns and primarily the specific goals. For example, planning your retirement, planning a vacation or buying your dream house. It is imperative to identify each goal depending on various factors such as age, income, gender, etc. You can take a call depending on the tenure, be it long or short term, and select the types of mutual fund schemes accordingly.

2.       Risk - Risk is an important factor to consider while choosing the types of mutual fund schemes offered by mutual fund Companies as risk is a phenomenon of uncertainty. Do consider your risk profile before opting for various types of mutual fund schemes like Equity, Debt or Hybrid Funds. Your type of mutual fund schemes will vary depending on their performance. Some examples of risk are:

1. Sudden surge in Covid-19 cases in India could impact the future of equity Markets.

2. Equity has risks involving volatility of the markets, quality of stocks invested, etc.  

3. Debt and hybrid funds also have other risks such as a) portfolio risk, b) change in Government policies affect portfolio component and quality of papers or c) rating agencies downgrading various money market papers.

3.       Investment Strategy- Ensure that the"

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