The Ultimate 9-Point Checklist for Mutual Fund Analysis

Alright, let's dive into this. I've found that, and the numbers tell us that over 40% of mutual fund investors are making a critical mistake right now. They're picking funds based on last year's returns or some arbitrary star rating. But here's the thing: the #one-ranked fund of 2024 is already underperforming its benchmark by 4% this year. That's not an anomaly; it's a pattern we see repeatedly.

From a technical perspective, chasing past performance is like trying to drive by looking only in the rear-view mirror. It might work for a bit, but you're bound to crash eventually. So instead, we need a systematic approach to analysing mutual funds. Let's break it down into a nine-point checklist that any smart investor can use.

1. Performance: Look for Consistency, Not Miracles

The data is clear on this: rolling returns are far more informative than point-to-point returns. So think about it algorithmically: if you're running a system, you don't just care about its peak performance; you want to know how it behaves over thousands of iterations. Here's how this works:

• Go to INDmoney
• Find the 'Rolling Returns' chart for your fund
• Your goal is to find a fund that consistently stays above its benchmark line (like the Nifty 500 TRI) more than 75% of the time over 3-year periods
• That's a sign of skill, not luck

2. Costs: The Silent Killer of Returns

From a numbers perspective, a 1% difference in expense ratio might seem trivial. But let's run the math:

That ₹13 lakh difference? It's not a rounding error. Now, it's the price of a car, paid for advice you never asked for. Always choose the 'Direct' plan. Check your fund's fact sheet for the Total Expense Ratio (TER).

3. Risk: Measure the Volatility, Not Just the Returns

In this volatile sideways market, understanding risk is crucial. Standard Deviation tells you about the fund's volatility. But the Sharpe Ratio is where it gets interesting. Though it measures return per unit of risk taken. The technical reality is this: a fund with a 15% return and a Sharpe of 1.2 is superior to a fund with a 16% return and a Sharpe of 0.8. Plus, you're getting more return for each unit of risk you're taking.

On INDmoney, compare the Sharpe Ratio of your fund to its category average. If it's lower, you're taking on more risk for less reward.

4. People & Process: Is it the Chef or the Kitchen?

Here's the thing: a good AMC has a strong investment process that outlasts any individual. Look for AMCs known for their research culture (e.g., PPFAS, 360 ONE). And does the fund house have a consistent philosophy across its funds?

The data is clear on this: funds with strong institutional processes tend to perform more consistently over time, even when star managers leave. Read the first two pages of the monthly Fund Fact Sheet. They describe their investment philosophy. Does it sound like a clear, repeatable process or just marketing jargon?

5. Portfolio: Look Under the Hood

From a technical standpoint, owning 5 different "Large Cap" funds that all hold the same top 10 stocks is not diversification; it's duplication. Use a tool like Value Research's 'Portfolio Overlap' or Moneycontrol's portfolio tool. Upload your funds. If the overlap is >30%, you essentially own the same fund twice. Now, consider consolidating.

6. Category: Use the Right Tool for the Job

Think about it algorithmically: you wouldn't use a sorting algorithm optimised for small datasets on a massive database. Similarly, don't use an equity fund for a short-term goal. Here's a quick reference:

Map your top three financial goals to this table. So do your current investments align with the recommended categories? If not, it's time to re-evaluate.

7. Size: When Being Too Big is a Problem

Here's the technical reality: a ₹40,000 Cr small-cap fund is like trying to run complex queries on a massive dataset with limited processing power. It just doesn't work efficiently. For small and mid-cap funds, be cautious of funds with AUMs that are excessively large for their category. There's no magic number, but if it's the biggest by a huge margin, dig deeper into its portfolio to check for style drift.

8. The Exit: Read the Fine Print

From a numbers perspective, an exit load of 1% might seem small. But if you're redeeming ₹10 lakhs, that's ₹10,000 gone. Plus, before investing, check the 'Exit Load' section in the fund details. Ensure it aligns with your minimum investment horizon. And for your emergency fund, use a Liquid fund, which typically has no exit load after 7 days.

9. Red Flags: The Bugs in the System

The algorithm suggests watching for these warning signs:

• High Churn Ratio (>100%): The manager is trading the entire portfolio more than once a year.
• Frequent Manager Changes: The captain keeps leaving the ship. 
• Unsustainable Returns: A small-cap fund that returns 150% in a year likely took on massive, unrepeatable risk.

Actually, scratch that, once a year, run your core funds through this checklist (trust me on this). You can find churn ratio and manager history on sites like Value Research. Look, what surprises most people is. If you see two or more of these flags, it's time to investigate further.

The math is simple: your goal isn't to find the 'best' fund. It's to build a robust system of 3-5 good funds that match your specific goals. Performance, Cost, Risk, People, Portfolio, Category, Size, Exit, and Red Flags. That's your 9-point system.

Here's what you can do right now: Pick one fund you own. And spend 20 minutes running it through this 9-point analysis using INDmoney or Value Research. And pay special attention to the rolling returns and expense ratio.

With FY26 around the corner, it's the perfect time to optimize your portfolio for both returns and tax efficiency. It's kind of like. The market might be choppy, but your analysis doesn't have to be.

Frequently Asked Questions

What is the most important factor to consider when analysing mutual funds?

While all factors are important, consistency in performance over time, as measured by rolling returns, is crucial. It helps differentiate between funds that have skilled management versus those that may have just gotten lucky.

How often should I review my mutual fund portfolio?

It's recommended to review your portfolio at least once a year, or whenever there are significant changes in your financial goals or market conditions. Use the 9-point checklist to ensure your funds are still aligned with your objectives.

Are direct plans always better than regular plans?

In most cases, yes. Direct plans have lower expense ratios because they don't include distributor commissions. This can lead to significantly higher returns over time, as demonstrated in the article's cost comparison table.

What should I do if I notice red flags in my mutual fund investments?

If you notice two or more red flags (such as high churn ratio, frequent manager changes, or style drift), it's time to investigate further. Consider speaking with a financial advisor or researching alternative funds that better meet your investment criteria.

Disclaimer: The content is meant for education and general information purposes only.  Past performance is not indicative of future returns.. The figures mentioned in this article are indicative and for general informational purposes only. Readers are encouraged to verify the exact numbers and financial data from official sources. Mutual Funds are non-exchange traded products, and INDstocks is merely acting as a mutual fund distributor. All disputes with respect to distribution activity, would not have access to the exchange investor redressal forum or arbitration mechanism. Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing. INDstocks Private Limited (formerly known as INDmoney Private Limited) 616, Level 6, Suncity Success Tower, Sector 65, Gurugram, 122005, SEBI Stock Broking Registration No: INZ000305337, Trading and Clearing Member of NSE (90267, M70042) and BSE, BSE StarMF (6779), AMFI Registration No: ARN-254564, SEBI Depository Participant Reg. No. IN-DP-690-2022, Depository Participant ID: CDSL 12095500, Research Analyst Registration No. INH000018948 BSE RA Enlistment No. 6428.