How to compare two mutual fund portfolios?

Mutual funds offer decent returns and may outperform other assets over the long term. As a result, most investors rely on mutual fund investments for long-term capital gains. Over a considerable timeframe, mutual funds can create incredible wealth and help you achieve your financial goals.

Additionally, mutual funds offer a variety of funds with a wide horizon of asset allocation and portfolios. You can choose which funds you want to invest in and decide your fund allocation.

However, choosing the best mutual fund that aligns with your investment goals can sometimes be confusing for a new investor. There are a few factors that you can consider comparing mutual fund portfolios and finding suitable investment options. This article takes you through the ways to compare various mutual fund portfolios.

Why should you compare mutual funds before investing?

When researching about investing in mutual funds, you will find numerous mutual funds providing unique benefits at nominal investments. Commonly, funds in the same category may look similar, which makes it confusing to choose between them. And since mutual funds are a long-term investment, you need to compare mutual fund portfolios on various grounds instead of returns.

Annualised returns only tell us about the value addition and capital gains, but what is missing is the risk management of the AMC (Asset Management Company), returns consistency, and the quality of the fund house. So, comparing mutual fund portfolios on these factors is crucial to find the most suitable funds.

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How to compare a mutual fund portfolio?

To arrive at the most suitable mutual fund, you need to begin with your investment objective, which can be a long-term or short-term investment. When you have the blueprint of your investment and what you expect, it becomes easier to find the right funds. After setting your expectations from mutual funds, consider the following criteria to compare various mutual fund portfolios:

1. Investment horizon

Investment horizon refers to the tenure you stay invested in the mutual funds. The investment horizon is essential when comparing mutual fund portfolios as it is directly linked with your goals and financial planning, and the selected funds must be in accordance with the investment horizon.

You can choose an equity fund for long-term investment and liquid funds or debt funds for short-term investments.

2. Risk

Mutual funds are subject to market risks since they are directly or indirectly invested in the markets. You must consider your risk appetite based on your financial goals to find a suitable fund. A high-risk fund can provide better returns but is prone to volatility.

To compare mutual funds risk profiles, you can use the alpha and beta rules, where alpha is the ratio of extra returns to gain, and beta gives the ratio of risk involved in the mutual funds.

3. Expense ratio

Every mutual fund has an expense ratio that the AMC charges for managing your funds. It is charged as a percentage of AMCs’ Assets Under Management (AUM) and directly influences your returns. When comparing mutual fund portfolios, look for funds that offer the right blend of expense ratio with performance.

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4. Sector allocation

Mutual fund investments are allocated in different sectors based on the investment objective. However, the asset allocation follows the Securities and Exchange Board of India’s (SEBI) mandate for every category. Asset allocation is crucial when comparing mutual fund portfolios because it impacts the fund’s risk profile. Consider your risk appetite and the mutual fund risk profile when choosing a fund.

Since there are various options in mutual funds, finding the right fund to invest in becomes crucial. Merely comparing fund returns isn’t sufficient for your goals. To meet your financial goals, you must consider the above factors to compare mutual fund portfolios.

Also Read: Expanding Your Portfolio: A Guide to Diversifying Your Investments


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