Check annualised returns of MF schemes over 3-5 years vis-à-vis peers and benchmark indices
What parameters should I look at while selecting a mutual fund scheme?
– Alok Ranjan
There are various categories of equity funds including large cap, diversified equity, small cap, mid cap, international equity, ELSS, sectoral, etc. Funds within each category have a similar investment mandate which deter-mine their risk and return characteristics. Small/ mid cap funds are suited for a horizon of at least 7-10 years, whereas large cap funds are suited for 5-7 years.
The first step in selecting equity funds would be to identify one’s investment horizon and risk appetite which would help determine the mix of equity fund categories to be held in the portfolio. Long-term consistency of fund performance is driven by multiple factors including quality of the investment team, strength of the investment process and philosophy and guidance of the fund house. When assessing historical performance, annualised returns over three to five years and above and calendar wise returns vis-à-vis peers and benchmark indices should be studied to evaluate consistency of performance. An additional filter of fund AUM can also be used to shortlist funds, for instance, equity funds with AUM of at least Rs 500 crore or Rs 1,000 crore can be shortlisted for further analysis. A few independent research companies provide analysis of the qualitative parameters and ratings for funds, online. Alternatively, you could also consult an investment advisor.
How do I calculate indexation in debt funds and will it increase my returns in the long run?
Based on prevailing income tax rules, indexation of the cost of investments in debt funds can be availed for calculation of long term capital gains (LTCG) tax on completion of a holding period of three years. The I-T department releases inflation index values annually, based on which the cost of investment can be indexed. Adjusting (increasing) the cost of investment based on inflation would reduce the taxable gain, thereby increasing the post tax return on the investment vis-à-vis a non-indexed investment. Tax rates applicable for calculation of LTCG tax on debt funds are 10% without indexation and 20% if indexation is applied. It would be advisable to consult a tax advisor for further details.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India)
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