It's that time of the year again for those of us who are not disciplined enough to do a systematic investment to save taxes & also to build wealth for future.
Last week I did a analysis of few tax saving mutual funds known as Equity Linked Savings Scheme (ELSS). The only difference between diversified mutual fund & ELSS fund is the latter has 3 years Lock-in period for each of the investments made whereas the former has 1 year Lock-in period.
I would just list down on the steps to eliminate funds that underperform the index & arrive at the top 5 funds.
- Consider Funds that are in existence from atleast 3 years.
- Select those funds where Risk grade is Average or Below Average or Low.
- Select only those funds that have Returns grade as Above Average
- Higher the Alpha value better the fund manager is, so choose a fund that has high Alpha value.
- Higher the Sharpe Ratio value better the fund is, so choose a fund that has high Sharpe ratio. (P.S: A Fund manager by not diversifying into many stocks can lead to the Sharpe Ratio to be high. So care to be taken in seeing if the mutual fund portfolio is fairly diversified)
The above 5 were the main way to arrive at some set of Mutual fund schemes in the category. Now comes qualitative way of selecting the funds among the shortlisted pool.
- Choose a fund/s that has lower Expense Ratio.
- The top 10 holdings of the fund ideally should not exceed 40% of the total holdings.
- If two funds have identical risk to reward ratio & similar Alpha & Sharpe ratio then better go for the fund that has performed over long term.
- While seeing the performance of a fund choose a fund that has consistently performed for atleast 5 year period or more.
These rules of selecting funds can be applicable to Diversified Mutual Funds or to even Balanced Funds. For sector specific funds a different set of rules needs to be considered.
Just before i conclude i applied the above steps for the ELSS Universe & came up with these 5 funds as good to invest in depending on their performance till now.
- Canara Robeco Equity Tax Saver
- Fidelity Tax Advantage
- HDFC Tax Saver
- HDFC Long Term Advantage
- Religare Tax Plan
Ideally it would be better if number of mutual funds in one's portfolio is kept to 3 or one can start off with 5 & depending on the performance of the funds can eliminate 2 funds and keep investing in the other 3 to create wealth.
I hope these guidelines would help an investor to choose a better fund that would help them to maximize their wealth.
Good websites for articles & performance of Mutual Funds are
Good websites for articles & performance of Mutual Funds are
Would be happy to answer any of your queries.
Disclaimer: Please note Mutual Fund Investment is subject to market risk. Past performance may or may not reflect the future performance. Information is shared in good faith only. Contact a Certified Financial Planner for professional help :-)
Thanks Vats :-)
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