How to Compare Two Mutual Funds Offerings?
Growth is all about consistent monitoring, evaluating, and making adjustments based on your findings. Like a garden needs a gardener not only to nourish the plants but also to trim the plants that have grown and to remove the rotting plants. Investing is also similar to gardening wherein you have to monitor the performance of your investments on a regular basis. When investing in mutual funds, you must be careful at all stages of the investment cycle. After choosing the right mutual fund for your needs, based on the due research, you also need to monitor and track the earnings of the same.
How to compare mutual funds?
You have to be diligent when evaluating your mutual fund investment, and below are four tips on comparing mutual funds:
- Using accurate benchmark index
- Comparing the right funds
- Comparing lumpsum and sip correctly
- Tracking funds offline and online
Let us understand each of these tips of comparing mutual funds in detail:
Using the accurate benchmark index
Comparing mutual funds with the benchmark index is the ideal way to determine if your mutual funds are performing well or not. If your fund is outperforming or performing at par with the index, then there is no concern. However, if it is consistently underperforming, then you should be on the alert and ready to switch funds based on your findings.
The consistent growth of Net Asset Value (NAV) of your mutual fund is a good sign, but the critical question to address here is that is the NAV growing at the same rate as the benchmark index?
As you know, mutual funds are invested in a mix of debt and equities and are affected by the ups and downs of the market. This directly affects the earnings that these mutual funds make. Thus, only the growth of the NAV is not relevant, you must also analyze its growth to determine whether the fund is underperforming in comparison to the market or not.
Comparing the right funds
It is never a healthy habit to compare apples to oranges and the same rule applies when comparing funds. When investing in mutual funds or when evaluating the performance of the chosen fund, you should not compare it to other funds that have a different investment philosophy.
If you have invested in a large-cap fund, you should compare its performance to other funds that are large-cap oriented and not with mid-cap schemes. Similarly, you must not compare the performance of debt funds with that of equity funds.
Lump sum vs. SIP
When you invest in a SIP, you invest a fixed amount and buy a small number of units periodically. Thus, the cost of these units is averaged out and each purchase gets a different timeline to grow. This directly affects the returns that they individually make.
On the other hand, when you invest a lump sum in mutual funds, you invest the entire amount. The number of units purchased depends on the then prevalent price. A lump sum investment gets the same period to grow.
Based on these two differences, the earnings of both investments will be different. This is true even if the monies are invested in the same fund and have the same investment horizon.
Online and offline tracking
Hard copies of the annual reports, half yearly reports and other newsletters containing all the details regarding the performance of your mutual funds, are sent by the fund houses at fixed periodic intervals. However, with the advancement in technology, nowadays these are sent via emails and even accessible on the fund houses’ websites. This new method is extremely convenient and popular with the tech-savvy generation.
The bottom line is that all the information required to monitor and evaluate the performance of your mutual fund(s) is available in the form most convenient to you. Online portals provide beneficial information that is useful to compare funds.
Example of Comparing two mutual funds
When you want to compare two or more mutual funds, you may choose different parameters. You may compare based on top rankings or absolute performance of the different funds. Furthermore, you may choose the period and the fund category to compare different schemes.
The following table shows the performance of two equity-linked savings scheme (ELSS) offered by L&T and DSP BlackRock. It shows the returns delivered by these funds during different periods.
|Mutual Fund Plan||Returns|
|L&T Tax Advantage Fund||20.85%||15.81%||18.61%|
|DSP BlackRock Tax Saver Fund||14.06%||15.62%||20.27%|
The above comparison shows that every fund has a different time to give favorable returns. After the first year, the L&T Tax Advantage Fund earned returns of almost 21%, but at the end of five years, the returns dipped to 18.61%. On the other hand, DSP BlackRock Tax Saver had a comparatively slower start as it could deliver 14% returns after the first year; however, the returns earned by this fund increased with time as the fund ended up giving returns worth 20% after five years. This is an important factor that you should keep in mind while comparing two mutual funds. Just because the fund is earning higher returns during the first year, it is not necessary that it would sustain the same. Similarly, if another fund is earning lower returns after the first year, there is a possibility that it could fetch higher returns with time.
In today’s age, knowledge is power, and it is available easily. You simply need to utilize it in the best possible way to maximize your benefits. Carrying out such monitoring and evaluating exercises could also tell you if you should boost your investments by buying more units or switch to better performing fund. However, be wary of making too many frequent switches.
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