How to select the BEST Mutual Fund — Transcript

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1. 0:00[Music]
2. 0:04a sir sir sir sir thank you for
3. 0:08increment now abish thank you sir
4. 0:11increments what's the problem walk me to
5. 0:13my room sir now I can make 1 CR how you
6. 0:161 10 years you won't make one no no I'll
7. 0:19tell you I'll tell you I philosophy is
8. 0:21simple so I'll invest the increment
9. 0:23percentage okay full n SI and you'll
10. 0:26make one in 10 years come here sir
11. 0:31every week how do you come up with a 1
12. 0:33CR plan now I'm
13. 0:35smart what's the plan see I'll tell you
14. 0:38I'll invest my increment in mutual funds
15. 0:41the 10% goes into mutual funds yes and
16. 0:44then it will make me one CR in 10 years
17. 0:47or so my Excel sheet says but hold on
18. 0:50you selected mutual funds and they going
19. 0:52to make you 1 CR how did you select the
20. 0:54mut I I know just just look at this you
21. 0:56see this list you see these top three
22. 0:58funds the first one what top return
23. 1:01funds correct returns genius look at
24. 1:04this no what's this number got it 36%
25. 1:0736% cagr and you projected this into the
26. 1:10future 10 years and that's how you
27. 1:12money Miss not cool tell me one thing uh
28. 1:16when you select a
29. 1:18stock what do you look at to select a
30. 1:20stock sometimes you buy stocks also
31. 1:22right what do you look at you have only
32. 1:24taught me I look at the fundamentals
33. 1:27sales revenue profits I look for the
34. 1:31sectors it sector banking just in case
35. 1:33if it sector goes down banking saves my
36. 1:35portfolio nice sounds complicated how
37. 1:37many metrics is this 10 15ish I don't
38. 1:40know okay and how many metrics did you
39. 1:42look for mutual funds returns and the
40. 1:44reason is ke mutual funds are managed by
41. 1:46experts and all you have to do is select
42. 1:49a fund correct actually no there is a
43. 1:52way to actually analyze mutual funds as
44. 1:55well so instead of looking at 15 20
45. 1:57metrics like you do why don't I tell you
46. 2:00some 1 2 3 4 5 6 metrics that we look at
47. 2:04and based on that you can select a
48. 2:06mutual fund you don't want to see me
49. 2:07make 1 now I don't know about that but I
50. 2:09don't want to see you die because your
51. 2:11expectations are too high let's
52. 2:15[Music]
53. 2:26begin so the first thing we're going to
54. 2:28do is look at something called rolling
55. 2:31Returns what you are looking at is
56. 2:34cagr this is a different kind of Ro give
57. 2:37me the poker
58. 2:39chips okay so what a mutual fund manager
59. 2:42is essentially doing money yeah and he
60. 2:46is thank
61. 2:48you
62. 2:51juice I'll ask you questions and if you
63. 2:53make the
64. 2:55wrong you have to eat drink Thea juice
65. 2:58cool okay cool so a mutual fund manager
66. 3:01is basically investing in different
67. 3:04companies and diversifying your risk
68. 3:06let's say with an equities now sometimes
69. 3:09out of pure luck which is completely
70. 3:12fine one of the stock does extremely
71. 3:14well does that make sense yes is return
72. 3:19is massively better than last year's
73. 3:21because this one stock or sector or a
74. 3:24group of stocks did extremely well and
75. 3:26it skews the average and because of that
76. 3:28the portfolio looks really nice in terms
77. 3:30of returns so how do we know that the
78. 3:33manager has luck or skill on his
79. 3:36side so we look at something called
80. 3:38rolling returns so now think about
81. 3:40Cricket in cricket if you have a batsman
82. 3:43and he's scoring 40 40 40 50 50 50 that
83. 3:46means there is some consistency you see
84. 3:48a pattern but what if someone scores
85. 3:50example there 200 somewhere in in one
86. 3:53game and the next few games is 40 40 40
87. 3:55but his average is also 50 who is
88. 3:57actually better the one which is who is
89. 4:00going through consistent average exactly
90. 4:02same thing in mutual fund so basically
91. 4:04we need consistency when we selecting a
92. 4:06fund and that's important sir I already
93. 4:09know this okay then can I get a
94. 4:13laptop so what a rolling return does is
95. 4:16basically you try to capture multiple
96. 4:18returns at the same time so let's say we
97. 4:20have six years to look at okay we look
98. 4:22at year 1 to year 4 Isa returns are 20%
99. 4:27now let's start from year two so two to
100. 4:31year five five so 2 to five returns are
101. 4:3516% now let's go to year 3 three to year
102. 4:39is 88.7% okay so if you had to go
103. 4:42forward you'll say year four to year
104. 4:45seven and so on and so forth so you
105. 4:47won't see the average of the last seven
106. 4:48years you will dissect it a little bit
107. 4:50and
108. 4:53see it's a rolling return makes sense
109. 4:58now this is fund a okay now the same
110. 5:00thing we'll do on fund B which is 30%
111. 5:03for first then 20% Then 177% almost 18%
112. 5:0818% so on one hand we have 20% 16% 8% on
113. 5:12the other hand we have 30% 20% and
114. 5:15almost 18% which is more consistent fund
115. 5:18B clearly right and both can actually
116. 5:22have a similar cagr similar return but
117. 5:24you want to go with the one that's more
118. 5:26consistent all you have to do is Google
119. 5:29the fund name
120. 5:30click on rolling Returns on whatever
121. 5:31website you go to and just compare
122. 5:33whether the numbers are almost the same
123. 5:35sir this is easy so basically I'll just
124. 5:37compare two funds and it's done right oh
125. 5:40wait wait so when you look at when you
126. 5:41look at a fund you have to compare it to
127. 5:43The Benchmark which is for every fund
128. 5:47The Benchmark is different another thing
129. 5:49you can also do is compare this with the
130. 5:51category average as well to see how
131. 5:53other funds are performing what is
132. 5:55category a so categories basically you
133. 5:58might invest in a certain Mutual fun
134. 5:59category like a hybrid fund or a large
135. 6:03cap Equity Fund Etc or an Els fund you
136. 6:06just compare s funds in that category
137. 6:09where does your fund stand it's a
138. 6:12comparison with the category average
139. 6:13this can also be found online not an
140. 6:16easy this is easy it's easy so you you
141. 6:17compare with the Benchmark you compare
142. 6:18with the category average rolling
143. 6:20returns and you're good the next
144. 6:22performance metric is the sharp ratio
145. 6:24what ratio sharp ratio sharp ratio sharp
146. 6:27with the E before explaining what sharp
147. 6:29ratio is we should actually explain what
148. 6:32standard deviation is hello let's
149. 6:34imagine there are two aircrafts of two
150. 6:36different brands flying from Mumbai to
151. 6:39Delhi the flight let's say is 2 hours
152. 6:42long okay now one flight operator is
153. 6:46usually late so on one day it's 35
154. 6:49minutes late on another day it is 40
155. 6:52minutes late on one day it is 10 minutes
156. 6:54late but if you look at it mostly it's
157. 6:56about 25 minutes late that's an average
158. 6:59it's 25 minutes away from the mean the
159. 7:02expected the 2 hours so standard
160. 7:05deviation is 25 minutes okay the second
161. 7:08flight is late only about 10 minutes
162. 7:11most of the time so standard deviation
163. 7:12is 10 minutes 108 10 so now that you
164. 7:15know AA standard deviation of time is 25
165. 7:17minutes the other is 10 minutes which
166. 7:18one which will yes obviously of course
167. 7:21this is what standard deviation is how
168. 7:22far away do you deviate from the mean
169. 7:25now to explain sharp ratio first let me
170. 7:28ask you a question
171. 7:31question let's suppose you have an
172. 7:34investment option that I'm giving you
173. 7:35and I'm saying there is a possibility of
174. 7:37making a 100% return on this I'll take
175. 7:40it and there is a second option J you
176. 7:43will make only
177. 7:4610% as a possibility which one would you
178. 7:48pick okay now what if I told you the
179. 7:52risk in this is
180. 7:54100% if it doesn't work out I will get
181. 7:57your house and if in this one J you're
182. 8:00making 10% if this doesn't work out Max
183. 8:03you lose is 1% which one would you pick
184. 8:07now but 10% is much lesser than 100%
185. 8:11which one would you pick I love my house
186. 8:13so what you just did was you didn't look
187. 8:15at just returns you looked at risk if
188. 8:17the risk is too much and this is stupid
189. 8:19risk you just won't take the risk right
190. 8:22H correct H the this is what the sharp
191. 8:24ratio does it Compares your returns to
192. 8:27the risk that you're taking because look
193. 8:29at a fund we say 30% returns but how
194. 8:32much risk are you actually taking we
195. 8:34want to know it's calculating basically
196. 8:36your
197. 8:38returns uh divided by the standard
198. 8:41deviation of that fund now the
199. 8:43interesting thing is numerator it's
200. 8:46actually coming from the difference
201. 8:47between your fund and a risk-free
202. 8:50interest rate you know why risk-free
203. 8:53risk free FD yeah fixed
204. 8:57deposit please sir three
205. 9:01pleas FD is not risk-free your risk-free
206. 9:04number actually comes from government
207. 9:06securities
208. 9:07[Music]
209. 9:10ma actually I'll show you one example
210. 9:12this fund that I've opened over here
211. 9:14it's sharp ratio is
212. 9:161.43 so this is good decent I would
213. 9:20compare this fund to all other funds in
214. 9:23the same category and see what their
215. 9:25shop ratio returns Etc are so if I'm
216. 9:28looking for elss fund I look for Sharp
217. 9:30ratio comparing I'll get the best sort
218. 9:32of fund and remember you can't optimize
219. 9:35for just one metric you have to have a
220. 9:37balance of everything so now let's see a
221. 9:39risk metric what do all mutual fund ad
222. 9:42say mutual fund say n PCO
223. 9:47PCO mutual funds are subject to Market
224. 9:50risk beta let's talk about beta so
225. 9:53basically beta measures the funds
226. 9:55volatility Against The Benchmark it
227. 9:57could be Nifty could be Nifty 100 could
228. 9:59be whatever but that's what beta
229. 10:01measures
230. 10:02so you will tell me the answer now okay
231. 10:06I'll give you a clue you also guess so a
232. 10:09beta of one means your fund volatility
233. 10:12and The Benchmark volatility is the same
234. 10:15it's one now let's say your fund is 1.2
235. 10:19more volatile by how much 2% 20 20% and
236. 10:23let's say the beta
237. 10:26is8 it is 20% less volatile than the
238. 10:29Benchmark that's it now the question is
239. 10:32which one will you choose higher than
240. 10:34one lower than one just select the one
241. 10:36which is equal to the Benchmark no I
242. 10:38think it's a very subjective ratio but
243. 10:40there is another ratio which actually
244. 10:42answers this question to a number and
245. 10:45it's called the capture ratio which will
246. 10:47have another ratio there's an upside
247. 10:49capture ratio and there's a downside
248. 10:50capture ratio so let's say Nifty moves
249. 10:53up
250. 10:545% okay and let's say your fund moved up
251. 10:57only 1% it's a very bad fun it's very
252. 11:00bad but what if your fund moved up also
253. 11:03moved up 5% though it's a good fund now
254. 11:06it's upside capture ratio is one so
255. 11:08let's say Nifty moved up 10% and your
256. 11:11upside capture ratio is two that means
257. 11:14your fund moved up 20% which means you
258. 11:17want an upside capture ratio greater
259. 11:19than one now what do you think will be
260. 11:21the answer for the downside capture
261. 11:23ratio I will not look at it no no no no
262. 11:26you want to make sure that your downside
263. 11:28capture ratio is less than one so if
264. 11:30Nifty Falls 5% you want the fund to fall
265. 11:34oh not 5% less than 5% less than 5% of
266. 11:37course last two metrics we will go to
267. 11:40a assets under management which is the
268. 11:43total amount the fund has in its Corpus
269. 11:46that it's investing uh usually what
270. 11:48happens is people go to a category and
271. 11:51they click AUM and they see the largest
272. 11:54fund and they think that's a good fund
273. 11:56because everyone's bought it I'm not
274. 11:58saying don't don't buy the highest AUM
275. 12:00fund or buy the smallest fund not saying
276. 12:02that so what I would say is remove AUM
277. 12:05from your metrics when you're looking at
278. 12:07um a fund the last one is the total
279. 12:11expense ratio you know what this is
280. 12:13right uhuh what is
281. 12:19it TR or total expense ratio is the fee
282. 12:23that the mutual fund company charges you
283. 12:25to handle your money I knew this
284. 12:30selfconfidence is the
285. 12:32key so what you want to do is you want
286. 12:34to make sure that you're investing in a
287. 12:36fund just TR is acceptable again don't
288. 12:40go just for the lowest TR because what's
289. 12:43the acceptable
290. 12:45te I don't know you'll have to look at
291. 12:48all the funds in your category and see
292. 12:50what the range is because the TR changes
293. 12:52and I can't give you a range for it so
294. 12:55now you have six metrics all of them on
295. 12:57your screen and I hope all of them in
296. 12:59your head when you look for a mutual
297. 13:01fund it'll take less than 5 minutes for
298. 13:04you to go through all of these five or
299. 13:06six metrics but once you do you'll be a
300. 13:08little more confident no one can pick
301. 13:11the best mutual fund a stock to give you
302. 13:13the best returns nobody all of these
303. 13:16things are done so you can sleep well at
304. 13:18night knowing you did everything you
305. 13:20could in Your Capacity and
306. 13:24is and that's the true key to happiness
307. 13:27also for appraisal also and for returns
308. 13:31expectation also keep them low hope for
309. 13:34the best appraisal expectation should be
310. 13:36high No it should be low so then if you
311. 13:39you give us if it's decent then you're
312. 13:42happy thank you sir for the appra no
313. 13:45there's no appraiser I hope you like
314. 13:47this episode if you did give a like say
315. 13:49something in the comments and see you in
316. 13:50the next episode and I'll get like and
317. 13:52subsscribe sales
318. 14:01so imagine these are
319. 14:10[Laughter]