How Do We Analyze Good Mutual Funds?

Filtering funds is an important step in selecting the best mutual fund for investment. It involves evaluating multiple aspects to determine the fund's capacity to achieve an investor's financial goals.

Mainly the filtration of funds is based on Asset Under Management (AUM), the investing experience of the fund manager, and the performance of the fund.

HOW TO ANALYZE PERFORMANCE OF A FUND?

To observe the performance of a fund, it is analyzed by running two kinds of tests.

• Risk Test (risk management efficiency)

The purpose is to identify potential risks, assess their potential impact, and then implement procedures to either prevent or mitigate those risks if they arise.

• Imagine you're on a journey, and the Risk Test is like determining how well your vehicle is prepared to manage unexpected road bumps. A car with strong risk management efficiency would include dependable brakes, airbags, and other safety systems to reduce the impact of any unforeseen incidents.
• Return Test (fund managers' capabilities)

To conduct the Return Test, fund managers examine the past performance of the investments they have chosen. If these investments have consistently surpassed benchmarks and provided positive returns, it suggests that the fund manager is doing an excellent job.

Among these, one important factor that adds value and plays an important role is the capability of the fund manager to outperform the market. They are the masterminds working efficiently to grow the fund to its full potential.

Likewise, the analysis of the return test is evaluated on the efficiency of managing the risk. The better the management the better the results.

HOW PORTFOLIO ANALYSIS IS DONE?

The portfolio analysis is carried out by following three quick steps which are as follows:

Strategical investment strategy

The strategy implemented by a mutual fund house has a major impact on the performance of a fund. The basic concepts of investing are:

• Growth-oriented investing
• Value-oriented investing

Let’s break down these two concepts into simple terms to make a clear understanding of the topic.

Firstly, growth-oriented investing is a technique in which investors focus on companies or assets that have the potential for significant capital gains. The major purpose of this technique is to invest in firms or assets that are likely to grow considerably in terms of earnings, revenue, or market share over time.

Furthermore, value-oriented investing is an investment technique that aims to find companies or assets that appear to be affordable in comparison to their true worth. Investors who take this technique look for opportunities when the market has undervalued a company, perhaps leading to beneficial returns when the market improves.

Portfolio allocation

This process involves the market capitalization of your investment portfolio. It means how much of the market is covered under your portfolio.

Portfolio allocation is dividing your investments among different assets, such as stocks, bonds, or cash. When we talk about portfolio allocation based on market capitalization, we mean the proportion of your assets in companies of different sizes.

For example, if a considerable amount of your portfolio is invested in large, well-established companies, your portfolio is said to have a large-cap allocation. Alternatively, if you invest more in smaller, rising businesses, your portfolio has a small-cap allocation.

Market capitalization in portfolio allocation ensures that your investments are spread across a wide range of companies, which can assist reduce risk and perhaps boost profits.

Sector-wise allocation

This step circles the individual performance of a particular stock.

Sector-wise allocation is the practice of distributing investment among various industry sectors, such as technology, healthcare, finance, and energy. When investors distribute their investments sector-wise, they spread their money across multiple industries, lowering risk. This is because even if one area performs poorly, investments in other sectors may still provide profits, so balancing overall portfolio performance.

For example, if an investor believes that technology stocks will outperform in the future, they may allocate a portion of their investing portfolio to these stocks. Similarly, if they foresee growth in the healthcare industry, they may allocate an additional amount to those stocks.

Sector-specific allocation enables investors to diversify their investments and perhaps profit from the expansion of multiple industries. It enables them to control risk and optimize their investments.

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