INVESTING IN MUTUAL FUND - SELECTION OF FUND

Greetings, Esteemed Readers,

In our ongoing series, we have covered five parts thus far. In this installment, we will delve into the practical application of the procedure discussed in our previous article (Part-5). However, before we jump into the practical aspect, let's take a moment to recap the essential checks:

• Define our financial goal.
• Determine our risk appetite.
• Utilise these steps to choose the right fund category.

Once we've accomplished these initial steps, we can move on to more specific sub-checks for selecting a fund within our chosen category. These sub-checks include:

• Assessing the age of the fund.
• Analysing the fund's Assets Under Management (AUM).
• Reviewing the fund's performance over various time periods.
• Evaluating the fund manager's expertise and their duration of association with the fund.
• Examining ratios and metrics in comparison to its peers.

Now, let's roll up our sleeves and dive into the practical session 😊. 

To illustrate, let's assume my financial goal is "wealth creation," which is a long-term objective, and my risk appetite is on the higher side. Consequently, I have decided to invest in the "Small Cap Fund" category.

Within this category, there are numerous funds available from various Asset Management Companies (AMCs). Our first task is to organise these available funds based on their "age of fund.”

I utilised the "ETMoney" website to filter the funds, resulting in a selection of 19 funds with over 3 years of operational history. Further refining by Assets Under Management (AUM) size, we arrived at a list of 11 funds:

• Quant Small Cap Fund Direct Growth
• Canara Robeco Small Cap Fund
• ICICI Prudential Small Cap Fund
• Tata Small Cap Fund
• Aditya Birla Life Small Cap Fund
• Invesco India Small Cap Fund
• Sundaram Small Cap Fund
• Edelweiss Small Cap Fund
• Bandhan Emerging Businesses Fund
• Union Small Cap Fund
• Bank of India Small Cap Fund

Next, we'll compare the performance of these 11 funds against the category average return. This analysis will help us identify the most promising options for our investment strategy.

*Source: etmoney.com

You can compare these Year wise in morningstar.in as like below. 

*it is of “Quant Small Cap Fund”.

After a thorough comparison with the category average, the following funds have shown better performance:

• Quant Small Cap Fund
• ICICI Prudential Small Cap Fund
• Sundaram Small Cap Fund
• Edelweiss Small Cap Fund

Now that we have narrowed down our selection, it's time to delve deeper and compare these four funds based on various ratios and metrics (Alpha, Beta, R2, Sortino, Sharpe, Upside capture ratio, Downside Capture ratio, Standard deviation, Expense Ratio and Turn over Ratio) to make a more informed investment decision.

*Source: morningstar.in

I trust that you have thoroughly reviewed the explanations of the aforementioned ratios in the prior articles (Part-3 and Part-4) and have a clear understanding of them. If not, I recommend revisiting those sections repeatedly until you feel confident in your comprehension.

Now, let's turn our attention to the table and evaluate the metrics of the funds in comparison to the category average. Please proceed to share your selection of the fund based on this metrics comparison in comments below.

To streamline this process, it would be beneficial to provide a ranking based on the individual ratios

Based on the comparison of these metrics, here's an assessment of the two top-performing funds:

• Quant Small Cap Fund:
• Generates higher returns but with high volatility.
• Exhibits a high expense ratio (1.78%) primarily due to a high turnover ratio.
• Generates a significant alpha of 9.83 despite the expense ratio.
• ICICI Prudential Small Cap Fund:
• Also generates higher returns (though slightly lower than Quant) with less volatility.
• Maintains a lower expense ratio compared to Quant Small Cap.
• Shows strong performance with relatively lower downside risk.

* And we need to see present fund manager association with these funds. 

Quant Small Cap:  

ICICI Prudential Small Cap: 

Considering these factors, the choice between these two funds depends on your risk tolerance and investment objectives:

• If you are comfortable with higher volatility and are seeking potentially higher returns, Quant Small Cap Fund could be the choice due to its higher alpha. (Higher expense ratio is due to higher turn over ratio).
• On the other hand, if you prefer a balance between returns and risk, and wish to minimize expenses, ICICI Prudential Small Cap Fund may be a more suitable option.

Ultimately, the decision should align with your personal financial goals, risk appetite, and investment horizon. 

I hope you understand it will, Kindly share your selected fund along with the reasons supporting your choice in the comments section below.