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Returns is the outcome of the process which the fund manager is monitoring, according to Kshitiz Mahajan, managing partner and chief executive officer of Complete Circle Wealth Solutions LLP.

“If it’s a consistent performance, it’s a great thing. One should actually look at what is behind the scene, that is the bigger and important part. Eventually, when you are investing in something, we are investing hard-earned money and you want the money to grow,” Mahajan said.

It’s quite natural for any of us to be looking at returns, because that is one thing an investor expects before an investing opportunity. But, there are some other aspects that can be looked at as well, according to Shalini Dhawan, director and co-founder of Plan Ahead Wealth Advisor.

Rolling returns are obviously much better, as a measure as compared with just trailing or point-to-point, she said. “What rolling returns essentially does is rolls the data, and it essentially is able to capture both the upsides and the downsides, much better rather than trailing.”

While trailing would probably give a little aberrated return data, rolling actually would smoothen out and also still have a weightage or an effect of upturns and downturns, according to Dhawan.

There are issues with using past returns as a parameter for evaluating mutual funds. This is because it is not a reliable indicator of the future and can vary with multiple factors, according to Mahajan.

He lists these Level 1 parameters to consider:

  • Monthly factsheet and see for any changes in top sector allocation or stock allocation.

  • Longevity of fund manager with the fund.

  • Rolling returns year-on-year.

  • Drawdowns when market has fallen in the past.

  • Standard deviation and beta.

  • Size of the fund in sectoral, mid and small-cap category.

“So, I think all these parameters are very important. Once you get the exercise done, then you can maintain on the basis of what is happening,” he said.

Any investor who is participating needs to understand the type of risk they are taking vis-a-vis the index, Mahajan said.

“Standard deviation and beta tells you that, especially beta. The benchmark is one, so if beta is less than one, it means vis-a-vis index, you are taking less risk, and that shows that most of the funds, which are able to beat index by taking less risk, make more sense,” he said.

With newer schemes, assets under management would probably be a concern and investors have to be a bit cautious, said Dhawan.

“Being a large investor, any movement of bigger investors in and out of the scheme could be a hindrance, but not for most of the bigger names in mid-cap and small-cap,” she said.

Mahajan recommends the HDFC Midcap Opportunities Fund as it has the parameters with the price-to-earnings one could have expected from a mid-cap fund. Parag Parikh Flexi Cap Fund is another fund to look at, he said.

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