How do we select a Mutual fund to invest up on ? Whenever this question comes to our mind we open one of the online apps from wherein you can invest in mutual funds and look for returns and majorly people look for high return mutual funds, which means they look for mutual funds schemes with Highest return in 3 year, 5 Year or 10 year period and then select the one with highest return to invest, but as we see any mutual fund advertisement it says “Past performance is no guarantee of future results” but we still select & invest in mutual fund schemes basis past performance which is incorrect or wrong approach to invest.
If returns based selection of mutual fund scheme is incorrect approach then on what basis should we select a particular mutual fund lets discuss on the same:
Whenever we buy a stock the most widely used valuation parameter is Price to earning (PE) and Price to book (PB ) ratios which signifies if a stock is cheap/expensive to the current price and also it provides a metric to compare with other stocks in the same sector, We should use the same metric that is Price to earning (PE) and Price to book (PB) ratios to compare mutual fund valuation. Let us see this with an example:
Comparing Valuation of Quant ELSS Tax Saver fund with AXIS ELSS Tax Saver Fund:
a. If you see the current PB ratio of Quant ELSS tax saver fund as on 23 June 2024 is 2.91 and same ratio of AXIS ELSS tax saver fund is 5.27 which clearly states that Quant ELSS Tax saver fund is more cheaper fund than AXIS ELSS tax saver fund.
b. Similarly if you compare PE of both the funds: Quant Elss has a PE ratio of 22.92 as on 23June 2024 and Axis ELSS has 31.93 here again Quant ELSS is cheaper mutual fund scheme.
Theme of the Mutual Fund
Now once you check the valuation of the mutual fund scheme you should check what all stock the fund is having in the entire portfolio, same data is widely available and can be checked on Value Research online or Fund Info page of AMC websites. Once you see this data of stock holdings by the mutual fund schemes you will see what theme is the fund following for that is it Consumption, Financial, Infra and so on. Once you identify the theme of the mutual fund scheme you have to yourself be optimistic on that theme. Let us understand this with an example:
Comparing theme of Quant ELSS Tax Saver fund with AXIS ELSS Tax Saver Fund:
- If you see below table of sector allocation we can clearly see that both funds have Almost equal allocation financial but Quant fund has much cheaper valuations
- Other sector for Axis Scheme is energy which has 10.50% allocation while Quant Scheme has 24.1 % in energy sector from this we can see Quant is more bullish on energy as a sector.
- Next if you see Axis has 12% in services while Quant has 13.70% in Metals.
- From the given data you can see Quant is more focused on metals & energy as theme , while axis is diversified among Energy ,Automobile ,Chemicals, healthcare &Technology.
Source of data is value research:
Axis ELSS Tax Fund | Quant ELSS Fund | ||
Financial | 24.50% | Financial | 24.90% |
others | 17.30% | others | 24.10% |
Services | 12% | Energy | 24.10% |
Energy | 10.50% | Metal | 13.70% |
Automobile | 9.60% | Consumer staples | 7.40% |
Chemicals | 8.90% | Healthcare | 5.90% |
Healthcare | 8.80% |
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Technology | 8.40% |
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Fund Manager View :
Last but not the least but find out more about the fund manager of the Mutual fund scheme and look out for his past performance of other schemes and also listed/read his interviews you will be able to understand what is the approach of the fund manager. For example if you listen to Sandeep Tandon of Quant he focuses on Margin of Safety and valuations.
Combining all these metrics and comparing mutual funds will give a clear shortlisted mutual fund scheme names which one should look to invest and do SIPs on for better and high returns.
Disc: Please note views are completely personal and opinion expressed within the context are from authors view point & experience. Please do not treat this as a buy or sell advice, not the author is giving any recommendation or advisory on mutual fund.