Mutual Fund Investment what to consider while Investing?

Updated: Oct 8, 2021

First of all, Ask yourself why to invest in MF?

In the world of declining interest rates and higher inflation, the only solution is to invest. It might be the real estate, metal or Stock market. Among all share markets is the best option to invest in as it is more feasible for all.


But for small investors, it is very risky and fundamental, technical analysis and extremely difficult to get updated on all of the news. so, the best solution for them is mutual funds.


A relatively safe and less risky way to invest in the share market.


A mutual fund is nothing but collect money from multiple people and invest in shares, securities and bonds. They try to get the highest return possible with accounting risk. MF passes profit or loss to the investors.


MF companies are basically known as AMC (Asset Management Companies).


Here comes boring history I share with every blog. One can skip.

Investment Funds are formed in the 17th century in the dutch basic aim was to offset risk and give diversity to small investors. (https://en.wikipedia.org/wiki/Economic_history_of_the_Netherlands_(1500%E2%80%931815))


In India, it started around the 1960s with the formation of UTI (Unit trust of India).

BlackRock is now the biggest fund house with 9Trillion+ dollars in Assets Under management. Approx 103.1 Trillion$ in Assets under management.


Few of the Advantages of Mutual Fund:-

  1. Increases diversity as more diversity lesser risk.

  2. Professional investors

  3. Transparency

Few of the DIsadvantages of Mutual Fund:-

  1. Fees we have to pay each and every time.

  2. We can't customize the investment we have to invest with their terms.

  3. Your return depended on the Fund manager's skill and you don't know who he/she is?

How we can differentiate Different Mutual Funds?

  1. Open-Ended MF:- MFs that can issue unlimited shares of investments in stocks or in bonds.

  2. Close-Ended MF:- Shares can be bought and sold on demand at their Net Asset Value (NAV) that is based on the value of the fund's underlying securities. It has a fixed number of shares and is traded among investors on an exchange.

Examples of Open-Ended MFs:-

  1. SBI Small Cap Fund

  2. Mirae Asset Emerging Bluechip Fund

  3. Aditya Birla Sun Life Banking & Financial Services Fund

  4. HDFC Balanced Advantage Fund

Examples of Close-Ended MFs:-

  1. SBI Tax Advantage Fund – Series III – Regular Plan

  2. ICICI Prudential Growth Fund – Series 2

  3. SBI Tax Advantage Fund – Series II

  4. ICICI Prudential Growth Fund – Series 1

Exchange-Traded Fund (ETF):- These are traded funds like stocks on exchange but their market prices are more closely to their Net Assets Value than closed-end funds.

All the factors like market conditions, premiums and discounts usually stay within 1% of Net Assets Value.


Speculators can trade intraday in ETFs.


Classification of Mutual Funds by Investment patterns

  1. Debt Funds:- They invest in fixed-income investments. Mostly invest in short/long term bonds, securities, money market instruments or in floating rate debts.

  2. Balance Funds:- mostly invest 50-60% of their portfolio in stocks and other 40-50% in other debt instruments. It balances Risk and provides get a return.

  3. Equity Funds:- Equity funds invest in stocks.

  4. Index Funds:- Index Funds is a type of mutual fund with a portfolio constructed to match or track the components of the market.

Investment plans in Mutual Funds:-

  1. Direct Plan:- Investors directly buy from mutual funds (mostly from its own website or from Paytm grow etc).

  2. Regular Plan:- Investor buy through an advisor, broker or middleman (AMCs pay the commission).

Advantages of Direct Plan:- Expanse ratio is less so, returns are a bit higher.


Disadvantages of Direct Plan:- The investor needs to manage everything on its own and have to make decisions on all investments by him/herself.


Advantages of Regular Plan:- No need to manage or make decisions by themselves.


Disadvantages of Regular Plan:- have to pay commission so, the charge might be a bit higher.


Investment Options in Mutual Funds:-

  1. Growth Option:- In the growth option they will not get any divide if paid by companies that will be re-invested

  2. Dividend Option:- The dividend will be paid out to the investors. For mutual funds dividends are collected and at a specific time, they are paid.

Types of Dividend option:-

  1. Dividend reinvestment:- Dividend distributed to investors after some intervals.

  2. Dividend Payout:- Dividend payout to the investor directly and credited directly to the investor's bank account.

Growth and Dividend Reinvestment looks similar?

Yes, they are similar only a small change in the number of units remained unchanged and in dividend reinvestment number of units increases.


Popular sites where you can find MF information easily

  1. Economic Times (https://economictimes.indiatimes.com/mutual-funds)

  2. MoneyControl (https://www.moneycontrol.com/mutualfundindia/).

  3. ET Money (https://www.etmoney.com/)

  4. Funds India (https://www.fundsindia.com/)

  5. Value Research Online (https://www.valueresearchonline.com/funds/)


Indicators and Metrics one should know before investing

  1. Expected Returns (Mean):- Its Average return of the mutual fund based on past performance.

  2. Standard Deviation:- How volatile mutual fund is. More volatility means more Risk associated with Mutual Fund. This can be calculated at any point in time. High Standard Deviation = High Risk

  3. Beta (β):- is the sensitivity of the expected excess MF returns to the expected excess market returns. In simple words, it is a systematic risk of MF comparison with the unsystematic risk of the entire market.


If β = 1 MF as risker as market, β > 1 MF is more risker compared to the market, β < 1 MF is less risker compared to market. β < 0 means return is opposite in direction with market.


CAPM (Capital Asset Pricing Model):- It is a very widely used model. It required the rate of return of an asset to make decisions about adding assets to a diversified portfolio.

Its Formula is

Limitations of Beta:- It depended on historical values. It's useful for predicting short term values not possible to predict long term values.


Alpha:- Used to determine the abnormal return of the Mutual Funds compared to theoretically expected returns. The reason to use this as Risker assets should have a high return compared to less risker. It is again based on CAPM.

Alpha = Actual Return - Expected Return
Expected Return = Actual Rate of Return – Risk-Free Rate – β * Market Risk Premium

R-Squared:- It measures the correlation between Investment's Performance and a specific Benchmark Index.


It is used to predict the trend that might occur in future by comparing the portfolio's performance with the broader market.

If R-squared is lower, then the beta is less relevant to the fund's performance.


Sharp Ratio:- also known as Reward to variability ratio. Used to examine the performance of investment after adjusting for its Risk. It basically gives a premium return you will receive in exchange for risk.

It observes both systematic and non-systematic risks


Treynor Ratio:- Also known as a reward to volatility ratio. It measures the return earned which has no diversification risk.

It is a product of the interest rate, inflation rate and GDP rate.


Higher the Treynor ratio, the better the performance of the portfolio as it has extremely low risk.


Sortino Ratio:- Measures the risk-adjusted return. It is used to score a portfolio's adjusted risk returns relative to an investment target using a downside. Basically, it is ranking mutual funds.

the only difference is that the Sortino ratio from the Sharpe ratio is that it only considers downside risk not considering upside risk.


Information Ratio:- also known as appraisal ratio. It is calculated using the return of the manager's portfolio divided by the amount of risk that the manager takes relatives to the benchmark.


IRR and its calculation:- (Intrest rate return):- It's a matric used in financial analysis to estimate the profitability of the potential investment.

It's the annual rate of growth that investment is expected to generate.



Fixed Maturity Plan:- For the investor who is not willing to take higher levels of risks and need more return compared to interest rates. An investor who can't handle fluctuation. It comes with the lock-in period. Tenure varies from 30 days to 5 years.


Piotroski F-Score:- It is numbered from 0 to 9 which is used to assess the strength of the company's financial position. 0 being less favourable and 9 being most favourable. It's used to find the best value stock or value mutual fund.

Named after Standford professor joseph piotroski. It is evaluated based on 9 parameters to evaluate each parameter, a stock gets a score of either 0 or 1. All 9 parameters in brief

  1. ROA (Return on Assets):- (Net Income before exceptional item) / (Total assets at the starting of the year) assigned 1 if ROA >0 else 0.

  2. CFO (Cash Flow from Operations):- (Cash from operations) / (total assets at the starting of the year). assign 1 if CFO>0 else 0.

  3. ΔROA (Delta Return on Assets):- (Current Year ROA) - (Previous Year ROA). assign 1 if ΔROA > 0 else 0.

  4. ACCRUAL (Unrealised Earnings):-

  5. ΔLEAVERAGE:- (Current Year Long Term Debts / Average Total Assets for last 2 years) - (Previous Year Long Term Debts / Average Total Assets for last 2 years). It will be 0 if ΔLEAVERAGE > 0 otherwise it will be 1.

  6. ΔLIQUID:- (Current ratio of the current year) - (Current ratio of the previous year). 1 if ΔLIQUID > 0 else assigned 0.

  7. ΔMARGIN:- (Gross Margin Ratio of Current Year) - (Gross Margin Ratio of Previous Year). It will be 1 if ΔMARGIN>0 else 0.

  8. ΔTURNOVER:- (Asset Turnover Ratio of Current Year) - (Asset Turnover Ratio of Previous Year). Asset Turnover ratio = total sales / total assets at starting of the year. ΔTURNOVER > 0 assigned 1 else 0.

  9. Equity Capital:- Amount of Equity offered in the current year. 0 if equity capital <= 0 else 1.

Mohanram G-Score:- number given between 0 to 8 which is used to assess the strength of the company's financial positions right now. It is used to find the best growth score. 0 less favourable and 8 highly favourable. 8 parameter and for each parameter score will be either 0 or 1.

  1. ROA (Return on Assets):- (Net Income before external items) / (Average total assets for last 2 years). 1 if ROA > Industry Median else 0.

  2. CFO (CashFlow Return on Assets):- (Cash from Operations) / (Average total assets for last 2 years). 1 if CFO > Industry Median else 0.

  3. Accruals:- Find Cash from Operations (CaFO) and Net Income (NI) 1 if CaFO > NI else 0.

  4. Stability of Earning:- Its variance of the company's Quarterly Earning return on Assets for the last 4 Years. 0 if variance > Industry median else 0.

  5. Sales Growth Variability:- Its variance of the company's Quarterly Growth of sales for the last 4 Years. 0 if variance > Industry median else 1.

  6. R&D (Research and Development) Intensity:- (Amount Spent on R&D in this year) / (Total Assets at the starting of the year). 1 if R&D > Industry Median else 0.

  7. Capital Expenditure Intensity:- (Amount Spent on Capital Expenditure in this year) / (Total Assets at the beginning of the year). 1 if Capex > Industry median else 0.

  8. Advertising Expense Intensity:- (Amount Spent on advertising in this year) / (Total Assets at the starting of the year). 1 if Advertising Expense Intensity > Industry median else 0.

Diversification portfolio of mutual funds:- Diversification needed to reduce systematic risk.

Easy hack to do this is

  1. Go for recommended Funds by experts might find in apps and genuine websites.

  2. Do a bit of research by taking their top 10 stocks do fundamental research and use your brain to speculate the future. Find F score if stock is value stock and find G score if stock is Growth stock and Find M Score of that fund.

  3. Order them based on the M score and discard them from the bottom.

  4. Invest money by dividing at least 4 chunks and invest 2 in growth 1 in value and invest 1 directly in the equity market.

  5. If index fund checks for 5 Years performance mostly index funds are giving decent returns

Few more types of mutual funds

  1. Value funds:- This kind of mutual fund follows a value investing strategy (invest in undervalued stocks based on fundamental characteristics. e.g. PE PB ratio companies).

  2. Growth funds:- Its primary goal is capital appreciation because that it does not pay out dividends. Focusing more on the future growth of the company.

  3. Contra funds:- Stock market assumption by analysts is that do you to emotions either market became extremely expensive or cheaper. most of the time contra funds invest in under-performing stocks or sectors at cheaper valuations.

  4. Arbitrage funds:- Invest in low risk and unstable markets they mostly buy from the cash market and sell in the derivatives market.




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