Mutual Funds: Eye opener! Investing on the basis of 5-star ratings? Read this first

Mutual Funds have gained immense popularity in the Indian security market. Mutual funds are the pooled security investment managed and controlled by fund managers. It offers you various features like Systematic Investment Plan (SIP), loan against holdings, exposure to more stocks and industries with less money etc. The new age investors like investing in mutual funds as they find it much easier, affordable, hassle-free and less volatile as compared to direct stocks. Pankaj Mathpal, MD, Optima Money Manager told Zee Business Online, ''Online mutual fund ratings are based on the experts' reviews, historical performance and some other factors but one should not just go with a fund by looking at its ratings. There are various other factors like alpha, consistency, and category that makes it an ideal option.''

However, is investing in a mutual fund that easy? Is it as simple as to check out a MF rating online and pour your money in? There are a number of mutual funds available in the market like, hybrid funds, balanced funds, equity funds, debt funds, sectoral equity funds, capital-based funds and so on. A rating given on mutual fund websites are generally given by the fund managers or organisational officials. However, it's not sure that the fund that has been given 5 star rating will fetch you more returns.

Deepesh Raghaw, Investment Advisor, Personal Finance Plan, added, ''The new investor can have an idea from ratings for choosing an equity fund, but those online ratings can be highly misleading in terms of debt funds. The ratings do not include many factors responsible for a fund to perform, though it may show you a picture of one year, a two rating fund can become a five rating fund in no time.''

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Here are some factors one should consider other than MF ratings, before putting his/her money into it:

1. Alpha: 

Alpha is a measure of an investment's performance on a risk-adjusted basis. It takes the volatility (price risk) of a security or fund portfolio and compares its risk-adjusted performance to a benchmark index. The excess return of the investment relative to the return of the benchmark index is its alpha. ''Alpha tells you about the risk you took to drive returns in comparison the index like Nifty or Sensex,'' explained Mathpal. 

2. Consistency: 

The other factor that is important to consider before picking up fund scheme is consistency. ''One should carefully examine the amount of consistency the fund has witnessed. A fund which has fetched 25 per cent returns this year, but bagged just 10 per cent last year is certainly a risky game. However, one that has been hovering around 15 per cent 20 per cent for quite a time is definitely a pick.''

3. Category:

There are a number of fund categories available and the investor should choose the best suitable for his style of investment. ''The other factors that the investor should determine before putting his/her money are selecting a fund category, return performance, expense ratio, alpha measure etc. Equity funds are comparatively decent to go with expert ratings for initial phases,'' claimed Raghaw.

''The new investor, who is not aware of the market behaviour and sectors performance should primarily invest in Hybrid or Balanced advantage funds. These funds are invested in both debt and equity but the good part is the ratio of division. The ration of investments into equity and debt is decided by the fund manager on the basis of performance and volatility, ensuring less risk and more returns to the investor, '' mentioned Mathpal.

Mathpal further added, ''Once the investor becomes aware and familiar to market, he/she can invest in multi cap and diversified schemes to ensure better returns with slightly more risk.''