Top 3 Metrics to evaluate an equity Mutual fund

Mutual Funds have always been a hot topic, and I have lost count on the number of times I have been asked about mutual funds. One of the most common queries has been the evaluation criteria. How do we evaluate Mutual Funds?

I would suggest that you look at these top 3 metrics when evaluating Mutual Funds:

Standard Deviation: It is a measure of mutual funds volatility. It measures the degree to which a fund’s return fluctuates in relation to its average return over a period of time. The higher the standard deviation the more risky the fund.

Climbing Piggy Shows Growth, Investment And Earnings

Sharpe Ratio: The Ratio explains whether the fund returns are due to intelligent investment decisions or the result of the excessive risk taken by a fund manager. This measure shows how much return a fund gives per unit of risk it takes. Always go with a fund with a higher Sharpe Ratio.

Beta: It measures the sensitivity of a fund’s return to the swings in the market. The markets beta is always one.

A more volatile fund will have a beta above one. Investors who lack the ability to stomach high volatility should go with low beta funds, as they are likely to yield a smoother performance.

It is very important to have a complete understanding of how the markets work. The right approach with the right set of goals in sight should be setting the stage for your success. As Benjamin Franklin puts it, “An investment in knowledge pays the best interest” . So, the next time you are looking at a Mutual Fund, evaluate it on the basis of these 3 metrics and let me know how the fund performed.

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  1. Pingback: How to invest in Equity Mutual funds? | Investor Horizon

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