With 1,513 of schemes out there in the industry mutual fund (MF) and more get added every day, there are too many options for investors to choose from. Investment advisors and distributors is there to help those who need a guiding hand. But if you invest directly in MFS, regardless of past performance, here are four ratios that can help you separate the wheat from the chaff.

standard deviation

standard deviation measures how volatile the fund has been. Simply put, the standard deviation measures the dispersion of proceeds of mean reversion.

Look for schemes with a standard deviation lower if you are conservative. But if the fund manager is too conservative, it can also lead to over-diversify or underperformance.

Check how the standard deviation varies from different time periods, to get a better sense of how the funds can be volatile during the different phases of the stock market.

The main drawback of the standard deviation is that it does not distinguish between good and bad volatility as it blindly into account both the negative and positive returns on average returns.

Sharpe Ratio.
Sharpe ratio of the scheme to help you understand how the fund has performed in relation to the risks taken by it. This ratio looks at the return of additional funds have produced returns over the risk-free investments such as Treasury Bill from the Government of short-dated, to the volatility of the fund. In other words, if your funds have a higher Sharpe ratio, it means it has delivered better risk-adjusted results.

Mid and small cap funds have higher Sharpe ratio, especially during bull markets. Ravi Kumar TV, co-founder of Gaining Ground Investment Services, says this is because there is more scope for stocks to regain rated (ie, get a higher valuation) in the mid- and small-caps. “As and when the valuations of mid and small cap stock run-up, Sharpe ratio rises,” he said.

But Sharpe ratio should not be the sole criterion for investing in the fund, as a higher Sharpe ratio may also mean that the funds are taking a higher risk. Data from ACE MF showed that the top five funds in terms of Sharpe ratio according to latest data Uni Mid Cap Fund (1.12), BOI AXA Flexicap Fund (1.12), ISK Small Cap Fund (1.05), Baroda Large and Midcap fund (0.92) and IDFC fund Emerging Business (0.72).

Beta

If you just want to know how much risk you are to own index funds, then look at the ratio Beta. If beta scheme is more than 1, it means that it is more stable than the index. If only one, it means you are equally at risk as the fund’s benchmark index. All passive-managed funds such as index funds and exchange-traded funds have a beta of 1.

If the fund portfolio largely overlapping that index, here too Beta closer to one. That’s not good news though, because the scheme you will only yield index, although charging fees for active fund management.

If the beta is less than one, it means the fund is less volatile than the benchmark.

portfolio turnover

Your fund managers buy and sell securities on a regular basis, if the scheme is actively managed. But if he’s buying and selling too much or selective? How often do you fund portfolio manager churns measured by calculating the so-called portfolio turnover ratio. Typically, measured over a period of last one year.

A low turnover ratio means that investment managers usually follow the ‘buy and hold’ strategy. But high turnover ratio is not necessarily bad; could be due to the preference to take advantage off investment on a regular basis.

In the diversification of mutual funds, HDFC Large and Midcap has the lowest turnover ratio (5.78 percent), according to the latest data. This is followed by HDFC Small Cap (6 per cent), Kotak Emerging Equity (6:09 per cent), Box Flexicap (7.44 per cent) and UTI Small Cap (7.68 percent). This does not include the newly launched funds.