How to select mutual funds beyond star ratings

May 12




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Investors should not blindly follow star ratings as they could mislead. Investors usually go about searching for the top-performing mutual funds and look for ratings to evaluate the best mutual fund. Investors need to take cognizance that not all best performing funds may always perform better than other one.


Why should you not only depend on ‘Mutual Fund Ratings’?

  • It is essential to look beyond rating for various types of mutual fund schemes. Investors need to consider the following factors:
  • Evaluate the financial health: An investor must thoroughly perform due diligence on his investment’s financial health

2) Portfolio composition: Investors also need to check the portfolio components,How to select mutual funds beyond star ratings Articles sector allocation, the credibility of government papers in different types of mutual funds he is looking to invest.

3) Cash level: Fund Managers adjust the cash level in their portfolio depending on the prevailing liquidity requirements and portfolio changes due to market cycles. If the equity markets are rising, they trim their respective allocations to keep a higher portion in cash and reduce the cash level during a falling market. Therefore, it is advisable not to blindly follow star ratings for various types of mutual fund schemes.

  • It is not wise to judge several types of mutual fund schemes based on star ratings, as they can also be subject to market risks. . Always remember high returns and high risk goes hand in hand.
  • In a nutshell – Yes, one can consider ratings for different types of mutual fund schemes to reduce the time on research, but this should not be one of the most important factors to consider while choosing a mutual fund.

Here are six factors to consider when choosing different types of mutual funds schemes in India beyond the best star rating  funds

  1. Goals – While investing in a mutual fund or several other types of mutual fund schemes, one must choose its goals in terms of the time period, returns and primarily the specific goals. For example, planning your retirement, planning a vacation or buying your dream house. It is imperative to identify each goal depending on various factors such as age, income, gender, etc. You can take a call depending on the tenure, be it long or short term, and select the types of mutual fund schemes accordingly.
  2. Risk - Risk is an important factor to consider while choosing the types of mutual fund schemes offered by mutual fund Companies as risk is a phenomenon of uncertainty. Do consider your risk profile before opting for various types of mutual fund schemes like Equity, Debt or Hybrid Funds. Your type of mutual fund schemes will vary depending on their performance. Some examples of risk are:
  3. Sudden surge in Covid-19 cases in India could impact the future of equity Markets.
  4. Equity has risks involving volatility of the markets, quality of stocks invested, etc.
  5. Debt and hybrid funds also have other risks such as a) portfolio risk, b) change in Government policies affect portfolio component and quality of papers or c) rating agencies downgrading various money market papers.
  6. Investment Strategy- Ensure that the investment strategy followed by a mutual fund company aligns with your goals and if it is conflicting, you should evaluate the reasons for it. It is suggested to go for a long-term approach instead of chasing returns that carry high risk.
  7. Expense ratio – The expense ratio is the commission or the fee charged from the investors to manage their investments. As an investor, you must target mutual fund schemes that have a low expense ratio.
  8. Exit Load - Exit load refers to the fee charged by mutual fund companies from investors while exiting from a particular mutual fund scheme.
  9. Fund Manager and Fund House – Check for the credibility of the fund house. Past performance may not sustain in the future is a reality. Do not blindly follow star performance. They could be futile in the future.


Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.