Not Earning Higher Returns? Here’s What You Should do
Mutual fund SIPs are providing a way to the investors to systematically attain all the future financial goals with ease. They offer excellent returns in the long-run and help the investors to create wealth. But, there are some investors who are not satisfied with the returns generated by their investments because sometimes it happens that investor fail to match the fund’s objective with his/her investment objectives.
If you are also facing the same problem and not earning high returns on your invested capital, then you must evaluate your investments to know their nature of generating profits. Here are the certain points which need to be considered to perform an evaluation and analysis of your mutual fund investments:
Portfolio Concentration Ratio : The weight derived to each stock or security by diversifying the total investible capital is termed as portfolio concentration ratio. In simple terms, the ratio in which the total capital of the scheme is bifurcated is known as portfolio concentration ratio. You can analyse this ratio to assure that the fund in which you are investing is diversifying your investments in the best stocks or not. The diversification must match the objective of the fund, e.g., a debt fund concentrates more into the top-rated securities whereas an equity scheme invests more in the top performing stocks in the market. Moreover, the weight of the top five stocks can also be taken into consideration.
Credit rating : If you have investments in debt schemes, then you can analyse the capability of the fund by checking the credit ratings. The papers, bonds, and other debt instruments in which this category invests hold specific ratings, which are given by the rating agencies. You can choose to invest in funds which deploy the capital in the bonds or papers with higher credit ratings. Note that the government debt bonds are risk-free. So, the credit rating needs not to be checked for them. But, you can evaluate the corporate papers by checking their credit worthiness.
Maturity Profile : Again, in debt mutual funds you can check the maturity profile of the instruments in which the fund is invested. Different instruments have different maturity terms, and you must opt for the one with maturity matching with your investment objectives. The papers with longer maturity are more sensitive to interest rate and capable of providing higher returns, while the short-term maturity papers offer higher interest rates but the yields get reduced.
Portfolio Turnover Ratio : To choose a compatible fund, which suits best to your investment profile, you must check the portfolio turnover ratio to know the frequency of trade in the portfolio. If the frequency of changes made by the fund manager in the portfolio of the fund is higher than the fund is suitable for an active investor. Contrarily, the fund having a low portfolio turnover ratio, means having rare changes in the portfolio during a year is good for a passive investor.
Sharpe Ratio : It indicates the excess returns generated by the fund against the risk taken. If the Sharpe ratio is higher, it means the fund has performed better in proportion to the risk taken by it. You need to compare the ratio within the category of the fund and must opt for the one which has a higher Sharpe ratio considering the other investment details too.
Exit Load and Expense Ratio : The amount of fee charged by the fund houses in the case you leave the fund as an investor is termed as exit load. Generally, all mutual funds charge different amount of load which typically ranges between 0 to 1 percent. A lower exit load is beneficial for investors because it ultimately lessens down your profitability. Moreover, the expense ratio is the amount of fee charged by the AMC to operate a mutual fund. The fund, which has less expense charges is better for investors in order to save the profitability of the fund.
Beta : It shows the volatility of the fund in generating returns and risk in comparison with the market. If the market is given a beta of 1.00 and the fund is showing the beta of 1.20, it means that the fund has capacitated to generate 20% higher profits in up market scenario, while the fund can also move 20% southward in the down-market scenario. Therefore, you must also consider the beta to choose any fund to invest. The higher beta means higher volatility and the lower one indicates the low volatility of the fund.
There are many other important points to be considered before investing or to analyse your existing investments in order to have a better investment portfolio and earn more profits.
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