Best Way to Use a Screener for Mutual Funds

When investing in mutual funds, you have a wide range of choices among various categories and sub-categories.

It can be rather perplexing at times when selecting mutual fund schemes. Moreover, as cited in one of our earlier editorials, you don't need more than 15 schemes in your portfolio.

So, then how do you zero in on schemes that are among the best and the most suitable for you?

Well, mutual fund screeners can be a good starting point to shortlist schemes for your portfolio.

[Read: How Many Mutual Funds Should You Invest in?]

What is a Mutual Fund Screener?

It is an online tool to compare mutual funds and is intuitive. It is designed to help investors efficiently navigate a vast array of mutual funds available in the market.

A mutual fund screener makes it possible for you to compare funds online - on historical returns, risks, ability to beat benchmark and/or peers, on portfolio concentration, risk ratios, fund category averages, and more.

All you have to do is select the category (equity, debt, hybrid, solution-oriented, and others) and sub-category (large-cap, mid-cap, small-cap, flex-cap, multi-cap, value, aggressive hybrid, balanced advantage, etc.).

Some screeners also allow you to enter your financial goals, define goals as short-term, medium-term, or long-term and your risk appetite, and then narrow down the schemes for you.

A range of customisations based on expense ratio, fund size (i.e. assets under management), risk exposure, etc., is also possible with a screener to further narrow down on choices.

Screeners can help you streamline your investment selection process and make an informed investment decision.

How to Use a Mutual Fund Screener?

Here's what you need to do to rationally use a mutual fund screener...

1. Begin by recognising what your personal risk profile or appetite is, i.e., whether you are a high-risk taker, moderate-risk taker, lower-risk taker, risk-averse, etc.
2. Determining what your broader investment objective is - capital appreciation (growth), regular income, capital preservation - and the kind of goals you wish to achieve.
3. Assess the time range of your goals - short-term, medium-term, and/or long-term.
4. After you followed the first three steps, select the fund type (equity, debt, gold, hybrid, solution-oriented) that aligns well with your needs.
5. After having selected the fund type, then filter among the sub-categories of schemes available.
   
   Say your investment objective is capital appreciation, you are addressing long-term financial goals, and you have a high-risk appetite. Among the equity-oriented funds, you may filter among the large cap funds, mid cap funds, value funds, flexi cap funds, aggressive hybrid funds, etc.
   
   The screener will display the performance of these schemes, the rating given to them, NAV and so on.
6. Select schemes that you find to be most suitable. In this process, make it a point to visit the factsheet pages and information or offer documents of the respective scheme to know their fundamental attributes.
7. Based on the information available in the factsheets and offer documents, do some more research on the scheme by using the filters of the screener, such as performance across time periods, bull and bear market returns, risk ratios, expense ratio, portfolio (top 10 portfolio holdings, top 5 sectors, and so on.

What to Keep in Mind When Comparing Mutual Funds

#1 Don't Compare Apples with Oranges

Simply put, the comparison should be between schemes from the same category and sub-category. You can't be comparing an equity fund with a debt fund, as the investment mandates of these two are very different.

Say you are comparing an equity fund with other ones; the schemes should be from respective sub-categories.

For instance, it would be incorrect to compare a large-cap fund with mid cap fund or a small cap fund. These have different characteristics. You need to compare within the sub-categories of these equity funds.

#2 Avoid Comparing the Net Asset Value (NAV) Of Mutual Funds

The NAV in itself does not reveal much about a mutual fund. It won't help you build a winning mutual fund portfolio.

It is a common misconception that schemes with low NAV will have a higher return potential. It is unlike investing in stocks, where demand and supply influence the price.

The NAV simply denotes the current value of all securities the scheme's portfolio holds.

#3 Don't Lay Much Emphasis on Past Returns

You see, past returns are not necessarily indicative of how a mutual fund scheme will fare in the future. If you rely too much on past returns, it is akin to driving the car forward but often looking at the rear-view mirror, which can be risky.

If the fund has delivered high returns, you also need to check the risk it has exposed its investors to. It would be unfair to assume that high returns would continue year after year.

Likewise, for a scheme faltering on returns. Mutual fund schemes' performance goes through cycles; so, a scheme may have its share of outperformance and underperformance.

It's important that you compare mutual funds holistically and rationally when using a mutual fund screener.

Conclusion

In this day and age, where information and data are the key, using a mutual fund screener can be helpful.

A sensible approach when using the screener may help you narrow down the best mutual fund schemes and possibly suitable ones for your portfolio.

Keep in mind that output derived by using a mutual fund screener is not an investment recommendation.

It's indicative short shortlisting done for you by the screener based on the parameters entered. As mentioned earlier, the screener is just a starting point.

After using a mutual fund screener, if you are unsure about which mutual fund schemes to add to your portfolio, reach out to a SEBI-registered investment adviser.

Once you have built your portfolio, make it a point to review and rebalance it. In a dynamic world, this shall ensure that you are on track to accomplish your investment objective and envisioned financial goals.

Be a thoughtful investor.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a recommendation and should not be treated as such.