Performance of Mutual Funds
PERFORMANCE OF COLLECTIVE SCHEMES 2013-2015
GIS Centre Mutual Funds Selection Philosophy
Performance (65% weightage)
We believe that the quality of the mutual fund company is the most important factor in picking the right mutual funds. Good fund houses carry certain investment methodologies and character traits that over time will ensure good investment returns. The best and most objective way of determining the quality of the fund houses is to look at the historical performance of the fund. Both the actual returns over various periods of time – mainly 1 year, 2 years, 3 years, 5 years – and the consistency of good returns, are important to us. We typically recommend funds of at least 3 years operating history. We only look at returns over periods of no less than one year. Anything less is not meaningful. We completely ignore the quarterly performance rankings. We feel that focusing on that will simply encourage short-sightedness – both on the part of the investors and on the part of the mutual fund companies.
Expense ratio (15% weightage)
The expense ratio is what you have to pay the fund house on a yearly basis. This charge is deducted from the value of the mutual fund. It takes into account all the expenses that the fund incurs, including management fee, administration and transaction costs, and marketing. Expense ratios typically range from 0.3% to 2.5% (less for index funds). The lower the expense ratio, the better it is for you, because you pay less.
Risk (20% weightage)
Instead of purely using statistics on standard deviation (volatility) as the measure of risk, which is what most people do, we feel that it is more appropriate to look at how well the funds hold up during periods when the relevant equity markets saw substantial decline. (Using purely standard deviation statistics will penalize the top performing funds as volatility data do not differentiate between a rising fund from a declining fund).
Money Market funds
The purposes of debt funds are to reduce volatility in an investment portfolio. People buy debt funds not to seek high returns (the best returns are derived from equity funds). The people who buy bond funds or fixed deposits want stability and consistency. Thus, in our analysis of debt funds, we used a different weighting of Performance 30%, Expense 30% and Risk 40%.