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Mutual Fund Scoring and Ranking

A scoring system designed to help you compare mutual funds and make informed investment decisions

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What is 1 Finance Score?

1 Finance scores involve a thorough evaluation and comprehensive analysis of various key parameters to assess all equity, debt, hybrid, and large-cap index open-ended mutual fund schemes in India with a track record exceeding one year. Each fund is assigned a score on a scale from 0 to 100 based on the evaluation of all associated factors. Here's an overview of our scoring system.

75 - 100High

50 - 75Medium

0 - 50Low

Scoring Parameters

In order to rank the mutual fund schemes, we take into account fundamental ratios for assessing risk-adjusted investment returns.Additionally, we incorporate the historical performance of funds previously managed by the fund manager, as well as the category of the funds they managed.

Our methodology

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TABLE OF CONTENT

What is a Mutual Fund?

A mutual fund is a collection of investments that pools money from multiple investors to buy a variety of securities, such as stocks, bonds, and short-term debt. The fund is managed by a professional fund manager who decides which securities to buy and when to sell them. Investors buy shares in the fund, which represent their ownership in the fund and its income.

Mutual funds are a versatile way to grow wealth through diversification. Whether you choose equity, debt, or hybrid funds, it is essential to compare mutual funds to find the one that aligns best with your financial goals.

Why Invest in Mutual Funds?

Investing in mutual funds provides numerous advantages that can help you achieve your financial goals:

Diversification

Investing in mutual funds helps you spread your investments across various asset classes, such as equity, debt, and gold, silver.
Why it matters: Diversification ensures that poor performance in one asset class does not significantly impact your portfolio. It helps you to reduce overall risk.
Compare mutual funds to find a scheme that offers the most effective diversification for your portfolio.

Professional Management

Mutual funds are managed by experienced and regulated fund managers.
Why it matters: Professional expertise can save time and improve potential returns, especially for new investors looking to invest in mutual funds.

Liquidity

Investing in mutual funds comes with ease of buying and selling of units, providing flexibility and quick access to funds when needed.
Why it matters: Liquidity ensures you can meet urgent financial needs without disrupting your investments.

Types of Mutual Funds

Understanding the different categories of mutual funds is crucial for building a well-diversified and goal-oriented portfolio. Here are the primary types of mutual funds:

Equity Funds

Equity funds invest primarily in stocks and are suitable for investors looking for long-term capital growth.
Key Benefit: High potential returns but with higher risk.

Debt Funds

It’s one of the types of mutual funds that focus on fixed-income securities like bonds and government securities, offering stable returns with lower risk.
Key Benefit: Ideal for risk-averse investors or those seeking stable income.

Hybrid Funds

Hybrid funds are a type of mutual funds that combine equity and debt in varying proportions to balance risk and reward.
Key Benefit: Suitable for investors seeking a mix of growth and stability.

Solution-Oriented Mutual Funds

These funds are designed to help investors meet specific long-term goals. They often come with a lock-in period to ensure disciplined investing.

Sub-Categories:

Retirement Funds: Focused on building a retirement corpus; typically have a lock-in period of 5 years or until retirement age.
Children’s Funds: Aimed at securing funds for a child’s education or future needs; come with a mandatory lock-in of 5 years or until the child turns 18.

Other Mutual Funds

These funds cater to specific strategies or niche investment needs.

Sub-Categories:

Index Funds: Track a specific index like Nifty 50 or Sensex, offering passive investment with lower expense ratios.
Exchange-Traded Funds (ETFs): Trade on stock exchanges like individual stocks; they can track indices, gold, or other assets.
Fund of Funds (FoFs): Invest in other mutual funds, providing a diversified exposure to multiple fund categories.
International Funds: Invest in global markets, offering diversification across geographies.
Commodity Funds: Focus on commodities like gold or silver; typically available as ETFs or FoFs.

When constructing a mutual fund portfolio, it’s important to compare mutual funds across different categories, including equity, debt, and hybrid funds and select suitable types of mutual funds. This helps you achieve a well-balanced portfolio tailored to your financial goals and risk tolerance.

How to Invest in Mutual Funds in India

Investing in mutual funds is easier than ever, with multiple options to suit different needs. Here's a breakdown of the most popular methods:

1. Online Investment Platforms:

Online investment platforms have become increasingly popular for investing in mutual funds in India, providing several benefits:

Advantages

Many online platforms provide you with direct mutual fund options which helps you save commissions.
With online investment platforms, you can access a wide range and types of mutual funds from different providers, all in one place. It's easy to compare mutual funds, their performance Online platforms are pure DIY platforms designed to be user-friendly, featuring tools like calculators, portfolio trackers, and goal-setting aids that make the investment process simple, even if you're investing in mutual funds for the first time.
They also offer great convenience and flexibility—you can invest in mutual funds or withdraw funds anytime, anywhere, and set up automatic investment plans to keep things hassle-free.

Considerations

These platforms will showcase the past returns which may mislead the investors.
There is no advisory through this platform, hence you need to be cautious while choosing the schemes.
Check the platform's fee structure to ensure it aligns with your budget.
Choose platforms with intuitive interfaces and reliable customer support.
If the platform provides you the free mutual fund services they might upsell or cross sell you some other products which may not be relevant for you.

2. Direct Investments Through Asset Management Companies (AMCs)

Investing in direct mutual funds through Asset Management Companies (AMCs) is a great option for those who prefer to manage their mutual fund investments on their own. It allows you to bypass intermediaries and take full control of your portfolio.

Advantages

Investing in direct mutual funds cut out intermediaries.
AMCs offer "direct plans" with lower expense ratios compared to regular plans, which can lead to saving costs and increase long-term returns.
You can gain access to detailed fund information, including investment strategies, portfolio holdings, and performance history.
AMCs usually allow lump sum investments or set up regular investments through Systematic Investment Plans (SIPs).
Investing in direct mutual funds gives you more control over your investments and allows you to switch between different funds within the same AMC.

Considerations

You must conduct your own research to choose the most suitable types of mutual funds.
You can only invest in the mutual funds offered by that specific AMC.
You have to deal with multiple AMC platforms if you're holding multiple schemes in your portfolio.

3. Investing in Mutual Funds via SEBI Registered Investment Advisors (RIAs)provides a personalised approach for those who seek professional guidance.

RIAs provides a personalised approach for those who seek professional guidance.

Advantages

Tailored recommendations based on your financial situation, risk tolerance, and goals.
Helps you invest in direct mutual funds and save commission. Provide 100% unbiased advisory.
Fiduciary duty ensures RIAs act in your best interest without commission bias.
Ongoing support, including portfolio monitoring and adjustments as needed.
Detailed personalised asset allocation planning.
Help you consolidate your existing mutual fund portfolio to reduce overlap risk.
RIAs not only advise but also help execute transactions and manage mutual fund portfolios on behalf of investors.

Considerations

RIAs may charge flat fees or fees based on assets under management.
Some RIAs have thresholds that may not suit small investors.

4. Investing in Mutual Funds through Distributors or Brokers

Investing in mutual funds through a distributor or broker has traditionally been the most popular way to invest, especially before the rise of online platforms or direct investment options. However, this method may not always be the most efficient or cost-effective way to invest, largely due to the Mutual fund distributor commission fees. These mutual fund commissions, which are often based on the funds sold, can create a conflict of interest, as brokers may recommend funds that provide higher commissions, rather than those that are best suited to your financial goals.

Advantages

Personalised assistance: Brokers offer guidance in choosing mutual funds, helping investors navigate complex options. But one should be careful as they might recommend you funds for their own commission.
Convenience: They handle the paperwork and administrative tasks, making the investment process simpler for those who prefer not to manage it themselves.

Considerations

Commission-based fees: Brokers typically earn mutual fund commissions on the funds they sell, which can lead to conflicts of interest. These commissions can increase costs and potentially affect the funds recommended.
Higher costs: The commission structure means higher fees compared to direct plans offered by AMCs, which may erode long-term returns.
Limited control: Investors may have less control over the choice of funds, as the broker may guide the selection, potentially influenced by commission incentives rather than the investor’s best interests.
Transparency issues: Some brokers may not always provide full transparency regarding fees and charges, leading to hidden costs that could impact investment performance.

If you want to calculate the commission component of your mutual funds, you can check our Mutual fund commission calculator.

Direct vs. Regular Mutual Funds: What Should You Choose?

When you compare mutual funds, it’s important to understand the difference between direct and regular plans:

Direct Mutual Funds

Purchased directly from Asset Management Companies (AMCs), bypassing intermediaries.Key Benefit: Lower expense ratios, making them cost-effective in the long term.Best For: Investors comfortable with independent research and decision-making.

Regular Mutual Funds

Bought through brokers or distributors who earn commissions.Key Benefit: help you place your transactions whenever you want to purchase or redeem your funds.Best For: Those who don't have access to qualified financial advisers or can not operate direct DIY platforms.

https://invest-igniter.live/blog/direct-vs-regular-mutual-funds-what-shall-you-opt/%3C/a%3E%3C/div%3E%3C/div%3E%3Cp%3EAdvisors who recommend direct plans are often seen as more impartial, as these plans do not include any commission fees or distribution costs. With direct plans, investors deal directly with the Asset Management Company (AMC), which helps ensure that the advice given is free from financial incentives tied to the recommendation itself. This structure encourages advisors to focus on providing guidance that aligns with the investor’s best interests.

In contrast, those who suggest ‘regular plans’ may have a different incentive structure. Regular plans include commission fees paid by the AMC to the mutual fund distributors or intermediaries. This could create a potential conflict of interest, as the mutual fund distributor might be more inclined to recommend funds that come with higher commissions rather than those that best suit the investor’s needs.

Understanding how an advisor is compensated can help investors make more informed decisions. Direct plans tend to support a more transparent and straightforward approach, while regular plans might come with commission components that could influence the recommendations given.

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Key Metrics That Helps to Evaluate and Compare Mutual Fund Performance

When evaluating or comparing mutual funds, it’s essential to rely on key performance metrics based on historical data (typically up to 10 years). Here are some key ratios and their significance:

Sharpe RatioMeasures returns relative to volatility, indicating how much excess return is earned for taking additional risk. Higher values suggest better risk-adjusted returns.

Sortino RatioFocuses on downside risk, assessing performance during unfavourable market conditions.

Treynor RatioAdjusts returns for market-related risks, helping compare funds based on sensitivity to market movements.

Jensen’s AlphaCompares actual returns with expected returns based on market risk. A positive alpha indicates better-than-expected performance.

Mutual funds that consistently score well on these ratios over extended periods are generally considered better investment choices. Hence, while comparing mutual funds, it is important to factor in these metrics to make informed decisions.

How to Compare Mutual Funds and Choose the Best Option

Comparing mutual funds involves assessing multiple factors to ensure you select the best option for your financial goals. Here’s a step-by-step guide to effectively compare and choose the right mutual fund:

Key Ratio Analysis

Metrics to Use:

Sharpe Ratio: Measures investment return relative to its volatility, indicating how much excess return an investor receives for taking on additional risk.
Sortino Ratio: Similar to Sharpe Ratio, but focuses solely on downside risk, providing a better assessment of an investment's performance in unfavourable conditions.
Treynor ratio: Evaluates investment return adjusted for systematic (market-related) risk, helping investors compare investments based on their sensitivity to market movements.
Jensen’s Alpha: Compares an investment's actual return to the expected return based on its market risk.

Why It Matters: These metrics help determine whether a fund provides better returns for the risk you’re willing to take.
Action: Compare mutual funds within the same category using these ratios.

Understand Risk Levels

Types of Risk:

Market Risk (Equity Funds)
Interest Rate Risk (Debt Funds)
Credit Risk (Debt Funds)

Why It Matters: Align the fund's risk profile with your personal risk tolerance and investment horizon.
Action: Use tools or platforms to assess each fund’s risk profile before investing.

Review the Fund Manager’s Experience

Why It Matters: A skilled fund manager can make a significant difference in performance.
What to Look For:

The amount of alpha generated by the fund manager in the same fund category they currently oversee.
The fund manager's cumulative experience in managing funds within the same category.
The fund manager's overall experience, spanning different market conditions and fund categories.

Action: Compare mutual funds managed by experienced professionals with a history of delivering consistent returns.

Consider the Expense Ratio

Why It Matters: The expense ratio impacts your net returns.
What to Look For:

Lower expense ratios for better cost-efficiency.
Expense ratios for direct plans vs. regular plans.

Action: Compare mutual funds within the same category and prioritise funds with lower expense ratios.

Analyse Tax Implications

Why It Matters: Taxation can impact your net returns significantly.
What to Consider:

Short-term and long-term capital gains tax.
Benefits of ELSS funds for tax saving.

Action: Compare mutual funds for tax efficiency, especially if you have a specific holding period in mind.

Evaluate Liquidity

Why It Matters: Liquidity ensures you can access your money when needed.
What to Consider:

Lock-in periods for certain funds like ELSS.
Redemption process and timelines.

Action: Prioritise funds with higher liquidity if you need easy access to your investment.

Steps to Choose the Best Mutual Fund

1. Define Your Financial Goals:

Are you investing for long-term growth, fixed income, or tax savings? Match the fund type (e.g., equity, debt, or ELSS) to your goal.

2. Match Your Risk Tolerance and Create Asset Allocation:

Assess your risk tolerance and try to have proper asset allocation
Use some advanced methodology or go through a qualified financial advisor who can help you create asset allocation.

3. Compare Similar Funds:

Compare funds in the same category (e.g., large-cap equity funds) to ensure a fair evaluation.
If you are unable to understand in terms of choosing schemes, prefer investing in Largecap index funds or good quality flexicap funds.

4. Use Online Tools:

Leverage mutual fund comparison tools available like Mutual fund scoring and ranking model to evaluate performance, costs, and other parameters.

5. Seek Professional Advice:

If unsure, consult a qualified financial advisor to guide your decisions.

Making the Most of Your Mutual Fund Investment

Keep Your Portfolio Simple and Clutter-Free: Aim for a focused and well-diversified portfolio to avoid redundancy and overlap across schemes. Over-diversification can dilute returns and make monitoring difficult.

Prefer Direct Plans Over Regular Plans: Opt for direct mutual fund plans to save on commissions and get higher returns in the long term. Direct plans have lower expense ratios, ensuring cost efficiency.

Avoid Chasing High-Return Funds: High past returns do not guarantee future performance. Focus on consistency and funds aligned with your financial goals and risk appetite.

Avoid Frequent Switching: Switching schemes too often can lead to unnecessary exit loads, tax implications, and loss of compounding benefits. Stick to your investment plan unless there's a significant reason to change.

Stay Disciplined and Patient: Stick to your investment plan and remain patient during market volatility. Mutual funds are long-term wealth-building tools, so avoid impulsive reactions to short-term market movements.

By taking a comprehensive approach to compare mutual funds, you can build a portfolio that matches your financial objectives, ensuring long-term growth and stability.

Frequently Asked Questions

What should I consider when comparing mutual funds?

When comparing mutual funds, you should make sure that your investment aligns with your financial goals. You can check the fund's risk-adjusted returns using metrics like the Sharpe and Sortino ratios, how consistently the fund is outperforming the benchmark. Compare these factors for at least 5 to 10 years. The fund manager’s performance and experience is also crucial, so review their track record in handling different market conditions. Make sure the fund’s risk profile and investment strategy match your investment horizon, goals and risk tolerance. Consider the tax implications, and check the liquidity to ensure you can access your money when needed.

Is past performance a reliable indicator when comparing mutual funds?

No, past performance is not a reliable indicator of future performance, as it does not guarantee similar results moving forward. Avoid focusing solely on historical returns when evaluating mutual funds, as this approach can be misleading and may fail to reflect future outcomes. High past returns might result from excessive risks taken by the fund, which may not align with your personal risk tolerance. Instead, adopt a comprehensive evaluation strategy that considers factors like risk-adjusted returns, fund consistency, and alignment with your financial goals.

How often should I review or compare mutual funds in my portfolio?

It’s recommended to review your overall mutual funds portfolio every three to six months but should avoid frequent rebalancing unless there are significant market changes to ensure they align with your financial objectives.

Can I compare mutual funds based on their tax implications?

Yes, you can compare mutual funds based on their tax implications, as different funds have varying tax treatments. For instance, ELSS funds, also known as tax-saving funds, offer benefits under Section 80C. Other equity and debt funds are taxed based on their holding periods, with short-term or long-term capital gains taxes applicable. By understanding these tax impacts, you can select funds that align with your investment horizon and help optimise your overall returns.

Who regulates the mutual fund industry in India?

In India, the mutual fund industry is regulated by the Securities and Exchange Board of India (SEBI), which ensures transparency, fair practices, and investor protection. Additionally, the Association of Mutual Funds in India (AMFI), a self-regulatory organization, supports SEBI by promoting best practices, representing mutual fund companies, and ensuring compliance with industry standards.

Disclaimer

The Information in the scoring and ranking model is provided solely for general information and educational purposes and shall not constitute any advice or recommendation. Mutual Fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. Past performance is not an indicator of future returns.