Advanced Mutual Funds

So you know what a Mutual Fund is. You have a SIP. But how do you know if your fund is actually good? Star ratings (5-star) are often misleading. Let's look at the real metrics.

1. Rolling Returns (The Truth Teller)

Most people look at "Point-to-Point" returns.

• "Fund A gave 15% in last 3 years."
• This is biased by the start and end date.

Rolling Returns calculates returns for every possible 3-year period in history.

• It tells you: "If I invested on ANY day, what is the probability of making money?"
• Good Fund: Consistent Rolling Returns (e.g., always > 10%).
• Bad Fund: Volatile Rolling Returns (sometimes 50%, sometimes -20%).

2. Risk Ratios (The Report Card)

Alpha (α) - The Outperformance

• Measures how much extra return the fund manager generated over the benchmark.
• Example: Benchmark (Nifty) gave 10%. Fund gave 12%. Alpha = +2%.
• Rule: Higher Alpha is better. Negative Alpha means manager failed.

Beta (β) - The Volatility

• Measures how much the fund moves compared to market.
• Beta = 1: Moves exactly like market.
• Beta > 1: More volatile (High Risk).
• Beta less than 1: Less volatile (Stable).
• Rule: For conservative investors, Beta less than 1 is good.

Sharpe Ratio - Return per Unit of Risk

• Formula: (Fund Return - Risk Free Rate) / Standard Deviation.
• Meaning: "Is the risk worth it?"
• Rule: Higher Sharpe Ratio is better. It means you are getting more return for the same risk.

3. Portfolio Overlap

If you own 4 funds, check their overlap.

• Fund A owns HDFC Bank, Reliance, Infosys.
• Fund B owns HDFC Bank, Reliance, Infosys.
• Result: You are paying two expense ratios for the same stocks!
• Tool: Use "Fund Overlap" tools online. Keep overlap less than 30%.

4. Expense Ratio Impact

A 1% difference sounds small, but over 20 years, it's massive.

Scenario: ₹10 Lakh investment for 20 years @ 12% return.

• Direct Plan (1% Expense): Corpus = ₹86 Lakhs.
• Regular Plan (2% Expense): Corpus = ₹72 Lakhs.
• Loss: ₹14 Lakhs! Just because of 1% fee.

5. Active Share

Measures how different the fund is from the Benchmark.

• Active Share = 0%: It's an Index Fund (Copycat).
• Active Share > 60%: True Active Management.
• Trap: "Closet Indexing" - Charging high fees but just copying the index. Avoid funds with low Active Share and high fees.

7-Day Action Plan

Day 1: Go to ValueResearch or Morningstar. Search your fund.
Day 2: Check Alpha. Is it positive over 3 and 5 years?
Day 3: Check Beta. Is it aligned with your risk profile?
Day 4: Check Rolling Returns graph. Is it consistent?
Day 5: Check Expense Ratio. Is it lower than category average?
Day 6: Use a "Portfolio Overlap" tool to check your funds.
Day 7: If a fund has consistently negative Alpha and high Expense Ratio, stop the SIP and switch.

Quiz

💡 Final Wisdom: Don't marry your mutual fund. Review it every year. If the manager changes or performance drops (Alpha becomes negative), divorce it.