Fund comparison is one of the common things you do to select funds for your mutual fund portfolio. If you are planning to add A fund, you first compare it with other funds of similar type or category, do your analysis and then make your investment. But are you doing it right?
I have said umpteen times in the past, selecting a few fund schemes from hundreds for your mutual fund portfolio is NOT an easy task.
It is a given that you want to have the best possible mutual fund portfolio for yourself, which delivers most optimised returns for your goals.
In your search, you compare funds by using all kinds of filters – quantitative as well as qualitative. Yes, some of you go even beyond the simple ratings and past returns to find out the true essence of a fund and its fit with your requirements.
I have seen how most investors make a mistake in doing this exercise. This leads to picking the wrong set of funds and can push your portfolio in the wrong direction.
Here are a few common mistakes to avoid when making fund comparison.
What is fund comparison?
In mutual funds, fund comparison is the act of choosing similar funds from the same category of funds and make a comparison on various parameters. By doing this comparative study, you choose the fund that is a best fit for your goals.
For example, in case of a large cap fund, you will tend to compare it with its peers in the large cap category. A Franklin India Bluechip fund will be compared with a ICICI Prudential Focused Bluechip Fund and a Kotak Select Focus Fund.
By making a comparison across a few funds, you pick one or more of that category.
How to select funds for fund comparison?
You can rely on some of the common filters to decide your peer group for fund comparison. Here are some that you may want to use.
- The starting point is the category. To make a correct comparison, choose funds from the same category.
- Pick funds of the same option – Direct or Regular.
- Pick funds that have at least 3 / 5 years of existence. Minimum experience you see!
- Eliminate funds below a certain size. For example, eliminate funds less than Rs. 100 crores in AUM.
- Avoid picking more than 1 fund from the same fund house. That will allow you to build a decent list of funds from across the universe.
You can add / modify parameters based on what matters to you.
With this, you should be able to pick 5 to 10 funds for your peer fund comparison and do a detailed study of such funds to shortlist the one that suits your requirement.
Now this is easier said than done.
Most likely, you use online tools for making this comparison. There is a bit of a problem there that you have to deal with.
#1 Picking funds based on a category can be tricky.
How?
The way funds are structured today on these sites in terms of category is very fluid.
There is a difference between a large cap fund a predominantly large cap fund. The large cap fund is what we discussed above. However, a predominantly large cap fund tends to go beyond the large cap into the midcap territory too.
A fund such as Aditya Birla SunLife Frontline Equity Fund is an example of a predominantly large cap fund. So is HDFC Top 200.
Specially, if you are choosing some of the popular online portals to study your funds, their category classification can be misleading.
I have seen HDFC Equity Fund categorised as a Large cap fund, when the fund itself states that it is a multi cap / flexi cap fund. This is further proven with its choice of benchmark, which is Nifty 500.
What is happening is that the site uses the historical portfolio breakup to decide the fund category, which can be in contrast with the self stated category of the fund.
The way to avoid this issue is to pick funds which follow the same / similar benchmark. When you are doing a fund comparison for Franklin India Bluechip, use funds which follow the Nifty 50 / Sensex benchmark index.
For a fund like HDFC Equity, use funds which follow the Nifty 500 / BSE 500 benchmark.
#2 Using more than 1 fund from the same fund house
The comparison sites end up using, for whatever reason, more than 1 fund of the same fund house for peer comparison.
Take for example, Franklin India Prima Plus Fund – Direct Plan.
The peer comparison I came across includes the following 4:
- Aditya Birla SL Advantage Fund
- Aditya Birla SL Equity Fund
- Aditya Birla SL Special Situations Fund
- Axis Focused 25 Fund
Beats me! This is no way to do a fair fund comparison.
In some ways it is incorrect too. All ABSL funds in the above peer list have BSE 200 as a benchmark, while Prima Plus benchmarks to Nifty 500.
You need to select funds from various fund houses so as to pick the best from across the universe.
Based on the parameters provided earlier, the peer list for Franklin Prima Plus can include the following funds.
- Kotak Opportunities Fund
- IDBI Diversified Equity Fund
- HDFC Equity Fund
- Parag Parikh Long Term Equity Fund
The above list makes far more sense from a comparison point of view. All the above funds
Fund comparison with new SEBI categorisation
The SEBI circular on the subject intends to resolve the above stated issues quite a bit, however, they can’t be eliminated. You will probably see better categorisation and benchmarking but which funds to choose for comparison is ultimately your prerogative.
Do your diligence and fund comparison to build your own portfolio.
Don’t rely blindly on what the online sites show you. Besides, you are not aware of the incentives that drive their selection.
What is your approach to fund selection and comparison? How do you go about creating your peer list? Do share with us in the comments.
I like to track the VRO star rating of the fund month on month for at least an year and then pick a consistent 4 / 5 star rated performer. I know you suggest looking beyond the star rating. However, I find the VRO star rating a good composite indicator of Returns vs Risk. That said, since it is a point in time rating, I like to consider star rating month on month for at least 12 months before making a decision. My financial planning is done keeping a conservative 12% returns by equity in mind. I would rather not make the selection process very complicated.
As long as you know what works for you, it is good!
Total AUM: should not be very less, should not be very big for mid/small cap
Benchmark: as per my portfolio requirement
Turnover ratio: should be near to category avg, less is preferable
capture ratio: >1, but with good downside capture ratio
consistency in returns: should not be one of a spike
How important is this fund for the fund house: is it the only fund in that catg, is it their flagship fund
etc.
list is very big
If selecting fund is one thing, keeping with that fund for long is another thing
style drift
change in my risk profile
etc.
Good points Girish. I am sure they work for you.
How about investing in quantum fund of equity funds? Its AUM is less than Rs.100 crores but that should not matter as the AUM of underlying funds is more. Fund of equity funds being treated as debt funds for taxation should not matter over the long term as indexation benefit over say 10 years or more can reduce the tax liability to below 10.4% as applicable to equity oriented funds. The only disadvantage that remains even over the long term is the somewhat higher annual expense ratio. However, its performance shows that its post expense returns are better than its bench mark and also better than many diversified equity funds. Investing in such a fund saves the investor the trouble of monitoring and rebalancing his portfolio as and when required. You expert take on QFOEF please.
Hello, I wouldn’t grudge the Quantum FOF a lower AUM, since this fund invests in other funds with a much larger AUM. So even a lesser AUM is fine. Your points about indexation are also correct. As for expenses, it needs its money to manage a fund like this. For a DIY investor who does not want to take any headache, this can be a good option.
Vipin,
Current portfolio for Quantum FOF is having 3 large cap , 2 Multicap, 2 Mid cap funds.
Why these many funds chosen for equity portfolio and what about Portfolio overlap.
Interested to know, Whether fund manager giving importance to single fund performance rather portfolio overlap and similar style funds from same category.
More diversification is more protection from ignorance.
In meantime, i have got response from Quantum AMC, this fund is suitable for first time investors, who wants more diversification.
And FM gives more importance to each fund selected.
But still not clear about my query on Portfolio overlap from Quantum team.
Not only this FOF, i have seen many recommendations from different MF investments portal (like scripbox,FundsIndia,Kuvera..etc) , all seems bunch of funds with similar style/category for investment .
I am more affected with portfolio overlap bug 🙂 . So questioning the basics of how these basket of funds selection process.
I have a simple yardstick for Mutual fund comparison.
I use just a single benchmark Nifty Next 50 TRI for large, midcap and multi-cap types. One arrow many targets 🙂 That kind of tells me what the compared fund is up to. Please always use TRI to get the true picture for benchmarks.
VR does not give TRI yet. Does unovest.co offers TRI comparison against a fund?
As long as it works for you it is good, Jai. As for TRI benchmarks, SEBI has now made it mandatory for funds to use TRI benchmarks. You can easily find them on fund websites. I guess most platforms will also add them.
In my view, a better solution to use is an index fund, since an index fund is a real portfolio with expenses and required activity, compared to a index which has no costs associated with it. That makes for an apple to apple comparison.
Thanks, Vipin,
Yes, index funds make sense, I should use icici nifty next 50 in this case, Tracking error seems to be on the lower side compared to idbi’s nifty next 50.
One issue is the fund houses are taking a lot of time with TRI, Not sure what the reason is? out of 40+ fund houses, only three has come out with TRI so far.
dspblackrock, l&T and IDBI
There’s a lot to hide. BTW, Quantum was the first one to have a TRI index way back in 2006.
agreed!! hiding behind a fig leaf!!
Yes, Quantum is a trendsetter with a clear vision and ethics.
agreed!! hiding behind a fig leaf!!
Yes, Quantum is a trendsetter with a clear vision and ethics.