- Date : 12/05/2022
- Read: 4 mins
The article covers all the factors you need to consider while making a comparison between two mutual fund schemes.
When it comes to Mutual Funds, you get access to a wide range of schemes that include debt, equity, and hybrids. These can even be further divided into more categories and various combinations. However, with the vast options available to investors, it often becomes difficult for them to choose which mutual fund scheme to go with.
The task becomes even more arduous if two schemes they are comparing belong to the same subcategory. Are you facing the same problem? Here's the good news - this article will give you tips on how to compare two mutual funds schemes so you can decide which suits you best.
What to look at while comparing Two Mutual Fund Schemes:
As per the Securities and Exchange Board of India (SEBI) norms, every mutual fund has to declare a benchmark index. It is this index that acts as a standard for testing the performance of mutual fund schemes. It will help you compare returns and investments for both the schemes that you are looking at.
For instance, Scheme X has returns of 10% in a two-year period against corresponding returns of 7% by the benchmark index during the same period. This shows that the scheme has performed better than its benchmark, and you can weigh it against another scheme's performance against its own benchmark.
2. Risk Exposure
Each underlying security has its own risk exposure that needs to be evaluated. Risk exposure for mutual funds includes the impact of market volatility on the underlying securities that have been invested in. Based on the risk exposure, mutual fund schemes are usually classified into five categories as given below:
- Low-Risk Mutual Fund Schemes
- Moderately Low-Risk Mutual Fund Schemes
- Moderate Risk Mutual Fund Schemes
- Moderately High-Risk Mutual Fund Schemes
- High-Risk Mutual Fund Schemes
So, when you are confused about choosing between any two mutual fund schemes, go for the one which aligns with your risk appetite. Some higher risk options may give you higher returns. But if you are in a position where you cannot take high risks, go for lower risk options and steadier returns.
Related Article: Different Types Of Funds Available Under Mutual Finds
3. Expense Ratio
When you invest in MFs, the fund house takes up the responsibility of managing your assets, and for this professional management, they charge a fee. This fee is a part of your investment, and has a direct impact on your returns. An MF with a higher expense ratio will cut into your profitability. You should look for mutual fund schemes that have good performance but lower expense ratio.
However, while comparing two schemes, make sure they belong to the same type and category. For example, that both are regular plan type or both are direct plan type. The expense ratio of regular plans is much higher than direct plans. So comparing schemes from two different categories will not give you the correct picture.
4. Sector Allocation
Sector allocation is a crucial factor when it comes to mutual fund schemes. So, as you compare two mutual fund schemes, have a clear understanding of the sectors your funds will be allocated to. Do some research, and try to figure out what the sector outlook is and whether these sectors are expected to perform well in the future. When you inspect details of both mutual fund schemes, go for the one which allocates funds to sectors that you believe will give good returns in the future.
Also Read: How to Choose an Equity Mutual Fund?
Mutual Funds are a great avenue for long-term investment, but selecting the right one for you can be an uphill task. When you compare two mutual fund schemes, don't forget to compare their yearly returns for the same period. This approach will help you assess the long-term profitability. Bear in mind that the expense ratio of actively managed funds is much higher than passively managed ones.