Confused about how to choose mutual funds? This will help.

Like most of you coming here, I also needed clarification about choosing the best mutual fund. I asked friends and colleagues and just invested in the funds. But if you know these parameters, you can analyse whether the money you're putting in will grow.

Photo by Austin Distel on Unsplash

In case you need to be made aware of a mutual fund, it’s a company(AMC Asset Management Company) to which you give your money, to invest it on your behalf so that you are spared from choosing stocks yourself.
So here are the seven parameters to compare mutual funds.

1. Beta
   Higher the beta better the returns are compared to Benchmark.
   Example: index funds have a beta of 1, meaning they perform similarly to Nifty50.
   If the beta is 1.5, the fund performs better than Benchmark by 0.5 per cent.
2. Alpha
   Performance of your fund — Performance of Benchmark.
   The whole point of Mutual Funds is positive alpha.
3. R-Squared (R² = 100)
   How much your fund graph varies compared to the benchmark graph.
   Example: Index funds have R² of 99–100.
   If a fund has R² less than 85, that's considered a poor R² fund.
4. Standard Deviation
   The measure of how much your fund graph oscillates between highs and lows.
   Example: at one point in time, your fund gives a 20% return, and at another time, it's down to -10%. This is not a good sign.
   Small Cap funds usually have a high standard deviation.
5. Sharpe Ratio
   Return of fund by its risk. The higher the Sharpe ratio, the better the fund has performed with a given risk.
6. Sortino Ratio
   Sharpe ratio uses standard deviation to check for the risk factor. This is where Sortino-ratio is different. It uses only the negative return's standard deviation. Hence being more accurate in which fund performs better considering negative returns.
   Formula wise :
   (Return of fund — Risk-free return )/(Standard Deviation of downside part)
   This means lesser the downside deviation better the performance of the fund.
   Example: FundA = 1.5, FundB = 0.8 (taking risk-free return same)
   FundA performed better, taking more risks compared to FundB.
7. Expense Ratio
   The amount of money a fund takes from your invested value to manage itself.
   Example: FundA with expense ratio = 1 will take 100 bucks if you invest 10000, that is 1% of your invested amount.
   This parameter is not a measure of the fund's performance but more of which you can choose with the best performance and most minor expense ratio.

So these are the seven main parameters you can look for while investing in mutual funds. One final piece of advice is that more than one parameter is needed to decide if the fund is good. If a fund has a meagre expense ratio and very low standard deviation but low beta, that means the fund is not very good. You have to take in multiple or all parameters and check and find the best-suited mutual fund per your financial planning.

Cheers :)