A ’s past return is easy to find. But for investors, the harder question is whether the Asset Management Company (AMC), fund manager, and fund itself have the characteristics to support consistent performance over different market cycles.
A recent issue of DSP Mutual Fund’s Neev lays out a research framework by Rahul Kulkarni, Mutual Fund Distributor and a Prudent Partner, to analyse funds beyond ratings.
Here is how can use these checks to analyse a fund before investing.
What should you check about the AMC?
The AMC is the institution behind the fund, so investors should look beyond its brand name and examine how it has operated over time.
- Ownership stability: Check whether controlling ownership has changed over the last 10 years, as this may coincide with changes in management or investment philosophy.
- NFO discipline: Assess how frequently the AMC launches new funds and whether each NFO serves a genuine portfolio need. The report notes,“Is the AMC launching a new fund every two months? That is not investment discipline. That is a marketing engine.”
- Contrarian behaviour: Review how the AMC’s flagship equity funds acted during major market corrections, such as March 2020 and the 2018–20 mid- and small-cap crash—whether they bought or sold.
How do you assess the fund manager?
A ’s recent performance should not be viewed in isolation. Investors should first understand the manager’s investment style and then see whether that style has remained consistent across different market environments.
- Style consistency: The report suggests, “Is the manager’s approach the same across market cycles, or does it drift with what is currently working?”
- Style beta versus skill: Investors should assess how much of the manager’s past alpha came from being in a style that was performing well and how much came from stock-picking ability.
- Skin in the game: Check whether the manager invests their own money in the funds they manage.
What should you look for in the mutual fund itself?
For the fund, investors should focus on consistency rather than one-year or three-year headline returns.
- Rolling returns: The report recommends looking at rolling returns. “What percentage of rolling 3-year periods has the fund beaten its benchmark? Consistency matters more than any single number.”
- Portfolio concentration: Check the fund’s top 10 holdings and sector concentration to understand how much the portfolio depends on a handful of stocks or sectors.
- Peer overlap: Compare the fund with its 3 largest peers. High overlap could indicate that an apparently different fund is holding many of the same stocks as other funds in the category.
- Cost versus differentiation: The report calls this the “Substitution test”. Investors can compare an active fund with the lowest-cost index fund in the same category and assess whether the active fund can justify its higher cost through differentiated performance. If it cannot, investors may consider the lower-cost index option.
For investors, the broader takeaway is that fund selection should involve more than comparing recent returns or ratings. Looking at the AMC’s behaviour, the manager’s consistency and skill, and the fund’s portfolio and benchmark performance can provide a more complete picture before committing money.
Disclaimer: This is purely for educational/informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.