In order to decide which Mutual Funds suits your financial objective, there are a few key metrics that can help with the decision-making process. Investors need to carefully analyze the following metrics and understand each of them before investing their money.
On Tickertape, we have taken into consideration the 6 main metrics that are fundamental to analyzing your portfolio.
1. Expense Ratio - In simple terms, the expense ratio can be defined as the annual fee charged by a given mutual fund scheme to manage the money invested on your behalf. This is similar to a maintenance fee charged by a house owner to their tenants. A lower ratio usually indicates higher profitability and a higher ratio means lower profits for an individual investor.
2. Yield to Maturity- This is the total rate of return that will have been earned by a bond when it makes all interest payments and repays the original principal. YTM is essentially a bond's internal rate of return (IRR) if held to maturity.
3. Sharpe Ratio - The Sharpe ratio is ideally used to gauge the performance of an investment after adjusting its risk. It comes down to maximizing your returns and reducing volatility. For example, if the annual return for a portfolio is 10% and had less or zero volatility, it is said to have an infinite (undefined) Sharpe ratio. The formula for this ratio is given below, Since it is practically impossible to have zero volatility, it is significant for the expected returns to increase helping with the increasing risk factor.
4. Cat Exp Ratio - This is the average expense ratio of all the mutual fund schemes in the category. It is helpful in comparing a mutual funds expense ratio with its category.
5. Cat Yield to Maturity Ratio - This is the average YTM of all the mutual fund schemes in the category.
6. Cat Sharpe Ratio - This is the average Sharpe ratio of all the mutual fund schemes in the category.