Next, look up the fund’s track record. When looking at trailing returns (one-year, three-year, five-year vis-à-vis category average), give higher weightage to longer-term returns. Do look at calendar year-wise returns as well over the past five to seven years (compare with category average) to know if the fund has been consistent.
Examine the nature of the portfolio. The equity count (number of stocks held), stock and sector concentration (in the top 10 stocks and sectors) would tell you if the fund is concentrated or diversified. A more concentrated fund can give you higher returns, but it will also fall harder if the fund manager’s calls go wrong. If you have to choose between two funds with similar levels of returns, go with one that is better diversified. Remember also that beyond 25-30 stocks, there is not much benefit from diversifying further.
Experts say the size of the fund shouldn’t be a primary criterion for selection. “Large assets under management become a deterrent to performance only in the mid- and small-cap space, not in large-cap funds,” says Vishal Dhawan, chief financial planner at Plan Ahead Wealth Advisors. The fund size, however, shouldn’t be very small (below Rs 100 crore) or else there is the risk of the fund house closing down or merging the fund.
The level of risk that the fund takes to fetch its returns is also important. Make sure that the fund’s risk-adjusted returns (indicated by Sharpe ratio and Treynor ratio) are above category average.
Check how much the fund manager churns his portfolio, as indicated by the turnover ratio (ELSS category median 47.50 per cent). Prefer funds that have a buy-and-hold approach.
Give preference to funds with a lower expense ratio (category average 2.42 per cent). Pay a high expense ratio only if it is justified by the fund’s performance. Avoid funds that take high cash calls. A fund that moves into cash in a big way (beyond five per cent) during a market downturn risks getting left behind when the market revives. Look for constancy at the helm. If the fund manager has changed recently, the track record of the fund loses its meaning.
In the next financial year, invest in an ELSS via a systematic investment plan or a systematic transfer plan so that your tax planning doesn’t happen at the last moment and you get the benefit of rupee cost averaging. Some of the funds you could consider for investing are Axis LT Equity, Franklin India Taxshield, BNP Paribas LT Equity, Birla SL Tax Plan and Religare Invesco Tax Plan.