Calculate before investing

New Delhi, November 10:

When it comes to mutual funds, which are touted as a useful vehicle for small investors, don’t be dazzled by the previous year’s high returns that may have occurred because of a surge in the stock markets.

The standard approach is to look at past performance, the risk associated — as indicated by standard deviation — and the rating given by credit rating agencies. But investors should delve into parameters like beta, portfolio turnover, stock or sector concentration, exposure to illiquid and unlisted stocks etc.

Standard deviation and beta indicate the risk associated with price volatility, which essentially indicates the uncertainty regarding the returns that the portfolio would generate in future.

Both these factors need to be used to compare two or more funds. The fund with higher standard deviation or beta is riskier than other funds.

“Since we don’t understand the mechanics of the stock market, we prefer to invest in mutual funds, which are less risky. And in the past few years, I have earned good returns on my investments,” said Ashish Goyal, a Delhi-based investor.

Mutual funds are however not guaranteed or insured by any government agency — even if you buy through a bank and the fund carries the bank’s name. Investing in mutual funds, you can lose money.

Every fund house or every fund manager has a particular style of working, certain values and certain appetite for risk. Some funds are aggressive while others are conservative. “Often, portfolio managers knowingly take certain risks in order to spawn ‘high water marks’, higher returns for the portfolio. Some of the approaches that the fund manager may adopt are taking higher exposure to certain companies or sectors where they have a very high conviction about a brighter future,” Vineesh Thukral, northern head (wealth management), ICICI Bank, said.

Rahul Prabhakar, product head of Motilal Oswal, said, “Some funds believe in taking certain risks, whereas others would keep away from those. While none of the approaches is wrong.”