How to invest in mutual funds?
Why an estimate of future upside is more useful than past performance when investing in Mutual Funds?
If you ever asked “when is a good time to invest in a specific fund”, you are likely to get one of two following answers and some very dirty looks:
“Yesterday”. Meaning you were stupid enough not to have invested in MF earlier and now you are asking an even more stupid question.
“You will never know, so do an SIP and keep investing and don’t bother what the market is doing.”
But you may have lumpsum money to invest or have been doing SIP for long and the corpus is quite large. What do you do? If you have done your asset allocation right, when the market move up and you rebalance you are confronted with the question of what to sell and at the other extreme, what to buy. So it’s a perfectly valid question deserving an answer. May not be the accurate answer, a good-enough one atleast.
Why is knowing the right time to enter a fund important?
This question is not about what is the right time to enter or exit the market, to warrant patronizing answers. It’s about a specific fund. Every good fund manager follows a process. To earn better than market returns, a fund manager constructs a portfolio different than the market following a process or betting on some factor. This portfolio return will not move lockstep with the market return. It will lag or lead the market from time to time. Every outperformance will be followed underperformance and vice versa. Yes there is no process that works all the time. So we need to answer ...........Read More
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MoneyWorks4Me method for rating and ranking mutual funds for SIP
MoneyWorks4Me rating and ranking of funds for SIP is available to subscribers only. Moneyworks4Me is not a rating and ranking agency, however it is required that users have a way of selecting funds and building a Portfolio. The method used by it are described below to enable users to understand the logic behind the rating and ranking Subscriber will find more details on this in the various content made available from time to time. In case you need more please write to besafe@moneyworks4Me.com
MoneyWorks4Me rates and ranks mutual funds based on the following data-driven system:
- Performance Consistency: This is measure based on whether the fund has beaten the benchmark index consistently. For this we compare the 3-year rolling returns of the fund with the benchmark for a minimum of 5 years and preferable 10 years. The period of rolling is one month and holding period is 3 years. Fund are color-coded Green on Performance when the fund beats the benchmark more than 90% of the time. It is Orange if it beats 80% to 90% of the time and Red if less than 80%. Funds with less than 5 year data are color-coded Grey.
- Quality of Portfolio Holding: Moneyworks4Me has color-coded stocks as Green, Orange and Red based on whether the company's performance has generated a ROCE above a threshold level (cost of capital) over 10 years (minimum 6 years) and generated positive Free Cash Flow. For Banks it checks whether ROE is greater than 15% and sales has grown over previous year. Stocks that perform consistently on these combined metrics are color-coded Green (min score 14 out of 20), Orange (between 8 and 14) and Red (less than 8 out of 20). Fund are color-coded Green provided the portfolio has 70% holding in Green stocks but not more than 20% in Red stocks. Funds with more than 20% Red stocks in the portfolio are color-coded Red. The rest are Orange funds
Funds ranking in screeners: Performance Consistency and Quality are two parameters used for ranking funds for SIP. The ranking as follows GG, GO, GR, OG, OO, OR, RG, RO and RR.
With the same color-coded funds, the one with the higher Average 3-year rolling returns (over 5 to 10 years), the number that appears in the Performance tag, ranks higher.
Here is the summary:
The third tag Upside Potential is not relevant for SIP. It is relevant for lumpsum investments in Mutual Funds.
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Q Very Good
Q Somewhat Good
Q Not Good
V+UnderValued (UV)
V Somewhat UV
V Fair Value
V Somewhat OV
V+ OverValued (OV)
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