How To Choose Mutual Funds

How to choose mutual funds
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Best Mutual Funds for SIP

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MANISH CHAUHAN 102 COMMENTS
95% of the salaried people are rushing to invest for tax savings (India) . 5% of smart people have already
done it (like me) .
The biggest rush i know must still be for LIC polices and PPF (because very less people in india invest in
Mutual funds still ..
In my earliar posts in have told which two mutual funds are the best candidate for investing now . They are
SBI Magnum taxgain and Sundaram BNP Paribas Taxsaver
Both of these mutual funds are long term consistent performer and come from very respected and best
AMCs in India. Both of these have always been one of the best in the category .
But time changes , situation changes
, We can analyse some numbers and see what are the future
prospects for these two mutual funds in comparison to each other . We will see on what basis we can
conclude that . Please read following conversation with my friend . It should give you some idea about how to choose
mutual funds and why one could be possibly is better than other .
Robert : Hey Manish , need some suggestion from you .

Manish : Hi robert , whats up how is life these days ? Manish : How is job going on ?
Robert : Nothing yaar , I am just busy with my tax savings , have to submit the documents ASAP , so need to
invest now , i am thinking of investing in a ELSS , Any suggestions ?
Manish : hmm See , There are two good funds i think you can invest in , SBI Magnum taxgain and
Sundaram BNP Paribas Taxsaver . These are the 5 star rated funds from valueresearchonline.com . You can
consider those .. But if you only want to invest in one ELSS , i would say go with Sundaram .
Robert : hmm.. Can you give me how you did this analysis and why are you saying that Sundaram looks
better than SBI at this moment . I thought if a mutual fund has been long term consistent performer and
our time horizon is more than 3-5 years, We can invest in any good funds .
Manish : That is true , I am not saying that SBI is bad and Sundaram is the best , we are trying to see why
Sundaram is a better choice for now . We will see the numbers and some charts , and we can look that
sundaram is doing much better than SBI from quite some time . That gives us good estimation of which one
http://www.jagoinvestor.com/2009/01/95-of-salaried-people-are-rushing-to.html
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is good for investing now . So , this requires some long duration talk , i will have to tell you the details , are
you ready ?
Robert : ok
Manish : So , Let me first tell you that Since Inception returns for SBI has been 16.67% , and for Sundaram its 19.35% , Which
is highly respectful .. Let us also look at the following chart of NAV of both mutual funds for last 3 years.
Green : Sundaram
Red : SBI
Blue : Sensex
Manish : You can see that in last 3 years , Sundaram has outperfomed SBI Magnum and and also was less volatile than SBI ,
when it comes to be consistent with Sensex .Also we must see the last one year charts of these two in isolation .
Manish : You can see that Sundaram has taken over SBI around Jun 2008 and has performed better than SBI . You must keep
in mind that NAV and index values has been rebased to 100, for comparison purpose only.
Robert : hmm.. that is fine , i understood that , we have some charts which tries to prove the point , But
there must be other numbers also which favors Sundaram over SBI .
Manish : Yes, let me tell you some things which you can use for comparison purpose .
1. Sharpe Ratio : Generally people judge mutual funds preformance by the returns only , whereas the better parameter is
Return with respect to the risk taken .
The Sharpe Ratio of a fund measures whether the returns that a fund delivered were commensurate with the kind of
volatility it exhibited. This ratio looks at both, returns and risk, and delivers a single measure that is proportional to the risk
adjusted returns.
So , Sharpe ratio is noting but risk adjusted returns , So higher Sharpe Ratio is better . Currently in Mutual funds industry ,
Sundaram Tax saver and Canera Rebecco mutual funds have highest Sharpe ratio of .15 . SBI has 0.0 .
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2. Alpha Ratio : This is very important ratio in mutual funds . Alpha is a measure of an investments performance on a riskadjusted basis. It takes the volatility (price risk) of a security or fund portfolio and compares its risk-adjusted performance to a
benchmark index. The excess return of the investment relative to the return of the benchmark index is its alpha.
Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts
from a fund portfolios return. A positive alpha of 1 means the fund has outperformed its benchmark index
by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. For investors,
the more positive an alpha is, the better it is .
Alpha for Sundaram : 3.35

Alpha for SBI Magnum : -1.18 !! (Bad)
3. R-Squared : R-Squared is a statistical measure that represents the percentage of a fund portfolios or securitys
movements that can be explained by movements in a benchmark index. Higher the R-squared Value , closer the mutual fund
to the index , what it means is that it will behave like Index funds upto that percentage , which means what if a mutual fund has
r-sqaure value of 100 , its nothing but an index fund , then why to buy the mutual fund and pay high manging fees , A mutual
fund should have a balance in R-square it should not be more than 90 and less than 80 . A mutual fund withless than 80
rsquare shows that they have more tendency to be volatile and be close to the index benchmark . forbes.com says : Mutual
fund investors should avoid actively managed funds with high R-squared ratios, which are generally criticized by analysts as
being closet index funds. In these cases, why pay the higher fees for so-called professional management when you can get
the same or better results from an index fund .
R-squared for ,
SBI Magnum : 94
Sundaram : 87
Read more about the ratios at :
http://www.investopedia.com/articles/mutualfund/112002.asp
Robert : Great !! , those ratios are really important parameters while judging the mutual funds . Btw , i
understood these things .. Any thing regarding holdings ?
Manish : Definately , Ratios are important , but we should also look at simple things like its holdings in
different types of companies . See below
Sundaram Portfolio
Market Capitalization
% of Portfolio
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Giant
56.17
Large
17.10
Mid
24.88
Small
1.85
04-07-2016
Tiny
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SBI Magnum
% of Portfolio
Giant
46.07
Large
21.48
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Mid
25.52
Small
6.91
Tiny
0.01
If you compare the investments by Sundaram , it has high concentration in Giant companies and have avoided investments in
Small and Tiny Companies , which helps in avoiding Risk (also returns can be affected, but more important is managing risk) .
Also in future when Markets improve and starts rising , front line stocks (big companies) will be the first to move up .
Robert : Any other small things to consider ?

Manish : Other things you should see are
Expense Ratio (lower the better) : Sundaram : 2,.24 , SBI : 2.5
Market Turnover
PE Ratio : Lesser is better
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PB Ratio : Lesser is better , SBI is better in this

There are many others
Robert : That is fine , but i can see that SBI is ranked 1st when you consider 5 yrs return and Sundaram is
2nd , I saw it on Value research online site .
Manish : True , But did you see its 3yr Rank also ? Its 5th !! and did you see 1yr rank : its 12th for SBI Where
as Sundaram is 2nd in 5 yrs , 1st in 3 yrs and 2nd in 1 yrs return category , which gives indication that
Sundaram is taking over as one of the best funds available over SBI slowly .
Robert : hmm.. that makes sense , Great !! i would really consider these points , this helped a lot .
Manish : My Pleasure !! , But please understand that there is no guarantee that Sundaram will outperform SBI next year or
from now on .. There is just a high possibility for it , because of our analysis .
Question : Guys (and gals) Do you you know who is Robert and Manish : ) Ans : Both are Me
, I just
created this talk to present the article and learning in a different way and to make it practical and
enjoyable .. i hope you all liked it .
Note : Please note that the views and analysis are personal , there may be some error , if someone finds any
please , let me know . I will correct it .. But i am sure there is no mistake or error in data .
Source : valueresearchonline.com and forbes.com
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04-07-2016
102 Comments
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Add Comment
vijay
November 21, 2015 at 11:29 am
very useful article sir.

sir i want to know how purchase mutual fund. is it necessary to purchase MF via agent.
Reply
Manish Chauhan
November 25, 2015 at 6:45 pm
No , you can go and buy it directly also from the fund house
Reply
04-07-2016
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Sushil
April 5, 2015 at 1:39 am
Hi Manish,
I am 27yrs old, 1st time investor.
I choose below MF for my Long Term(10 years) SIP based on Standard
Deviation,Sharpe Ratio,Alpha,Beta,
Expense Ratio,Turnover ratio and my risk capacity.
Can you suggest if below funds are okay or need some changes.
Tax Saving
1) Axis Long Term Equity Fund-Direct(G)-500/2) Reliance Tax Saver-Direct(G)-500/Large cap Equity
3)ICICI Prudential Focused Bluechip Equity Fund-Direct(G)-1000/Mid&Small cap Equity
4)ICICI Prudential Value Discovery Fund-Direct(G)-1000/Reply
04-07-2016
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amit
April 7, 2015 at 10:40 am
Hi Sushil, Bluechip equity fund with ICICI is a great option considering the
kind of investment you are looking for . You can also check
http://www.icicipruamc.com/equity-funds/ICICI-Prudential-Tax-Plan.aspx
for more information.
Reply
Manish Chauhan
April 24, 2015 at 7:27 pm
Looks good to me !
Reply
Sushil
May 9, 2015 at 2:51 pm
Thanks Manish and Amit,

I have started my Mutual fund SIP investment in below funds
Tax Saving
1) Axis Long Term Equity Fund-Direct(G)-1000/Large cap Equity
2)ICICI Prudential Focused Bluechip Equity Fund-Direct(G)-1000/Mid&Small cap Equity
3)ICICI Prudential Value Discovery Fund-Direct(G)-1000/4)Balanced Fund
HDFC Balanced Fund Direct(G)-1000/Reply
Manish Chauhan
May 29, 2015 at 5:22 pm
Great
Reply
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Koushik Das
December 19, 2014 at 7:49 pm
Hi Manish,
I am planning to do sip of 20K /month in for next 5-7 years.
I am planning for equal distribution of 4k/month for the following fund.
Tata Balanced fund
ICICI prudential balanced advantage fund
UTI Opportunities Fund
Quantum Long term equity
HDFC Mid cap
I am a moderately aggressive investor.
Please suggest accordingly,
Thanks,
Koushik Das
Reply
Manish Chauhan
December 26, 2014 at 2:14 pm
These are good enough funds . you can continue in these !

Reply
drdineshnaidu
June 14, 2014 at 10:35 am
Dear Manish,
Presently I am analysing few MFs as per the points in this article. But I am unable to
get the 3 year and 1 year charts for comparison. Kindly guide me regarding how to get
these charts and how to rebase them to 100. If any website is providing the same, then
please let me know.
Thanks and regards,
Dinesh
Reply
Manish Chauhan
July 5, 2014 at 4:12 pm
You will have to spend some time to find them properly . No one website I
can point you to !
Reply
04-07-2016
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Chetan Ambi
October 22, 2013 at 8:11 am
Manish,
Brilliant article. Though I have heard n seen sharp ratio, alpha ratio, r-squared in VRO
etc I never understood their meaning. This article really helped me. Tnx a lot !! Btw
VRO is now revamped and I dont see these ratios on the site. Or Am i missing
something?
Reply
Manish Chauhan
October 26, 2013 at 10:35 am
HI Chetan
Thanks .. I have not looked at VR revamped version . Will have a look
Reply
Raj
September 17, 2013 at 1:29 am
Hi Manish,
I have recently invested in ICICI Pru Balanced fund for 3 years with monthly SIP of
2000/-. What would be the other best investment alternatives/MFs for another
2-3K/month ?
Thanks for your response!
Reply
Manish Chauhan
September 17, 2013 at 6:44 pm
There are many Quantum Long term equity fund is one ! . Another is SBI
emerging business !
Reply
04-07-2016
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Balaji
March 17, 2013 at 5:26 pm
Manish, great Blog, I am planning to start my MF investments through SIP in below. ll

are targeted for a Three year period. My intention is to invest in Low risk funds.
1. HDFC Taxsaver Growth (500 Rs/-)
2. ICICI Prudential Focused Bluechip Equity Fund Retail Growt (1000 Rs/-)
3. UTI Opportunities Fund Growth (1000 Rs/-)
4. SBI Gold Fund Growth (1000 Rs/-)
Could you please provide ur comments on the abovedoes this qualify as a decent
portfolio ?
Reply
Manish Chauhan
March 19, 2013 at 11:11 am
I would say just choose 2 of them

HDFC tax saver and UTI opportunies are good choices overall ..
Reply
Balaji
March 20, 2013 at 9:46 pm
Thanks Manish,
I have a sharekhan demat account, I would like know if there will be
any charges that will be levied by sharekhan on my SIP purchases?
Reply
Manish Chauhan
March 21, 2013 at 8:38 am
I have heard that they dont have any charges, but better
confirm it once from the customer care
Reply
04-07-2016
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pramod
July 10, 2012 at 4:16 pm
Manish, firstly I want to congratulate the great work you keep doping here.
It would be great if you give some ideas as I am planning to start my MF investments
thru SIP in below list considering thier history and feeling diversified..
1. HDFC 200 (2000 Rs/-)
2. IDFC Premier Equity Plan A (2000 Rs/-)
3. ICICI FMCG (2000 Rs/-)
4. Reliance Pharma Fund (2000 Rs/-)
5. UTI Gold ETF (2000 Rs/-)
can u just throw u r comments and I am sure your expertise will help me to choose the
right ones any..
Reply
Manish Chauhan
July 10, 2012 at 7:13 pm
Pramod
WHy are you choosing the mix of funds ,why not just pure equity diversified
funds ? What is your goal in next 5 yrs ?
Reply
veera sekhar
April 1, 2012 at 12:23 pm
when all the people are invest their money into different mutual funds basing on the
investors preference or funds manager preference how can you justify
Reply
Manish Chauhan
April 2, 2012 at 5:42 pm
Veera
Justify what ? can you explain ?
Reply
04-07-2016
Page 15 of 18
Darshan
very useful article manish.. gave a good idea on how to clear the clients questions..
Reply
manish
hi,
i visited this site today only and too by chance. This site is very informative. I learnt a
lot from the articles, which I read today. Just by chance, my name is also manish
thanks,
Reply
Manish Chauhan
Manish
Good to hear that you learnt a lot .. keep reading
Manish
Reply
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