How to Compare Two Funds Rationally

Introduction

Comparing two mutual funds is like choosing between two cars. One might be faster, but the other offers better mileage and safety. Similarly, mutual funds need to be judged on more than just past returns.

Let’s understand a rational, checklist-based approach to fund comparison that goes beyond the headline numbers.

Key Parameters to Compare Mutual Funds

1. Category & Benchmark
   Compare apples to apples. A Flexi Cap fund shouldn’t be compared with a Mid Cap fund.
2. Returns
   Look at 3-, 5-, and 10-year CAGR and Rolling Returns. Point-to-point returns can be misleading.

1. Risk Metrics
   Check for:
• Standard Deviation (Volatility)
• Beta (Market Sensitivity)
• Sharpe Ratio (Risk-adjusted returns)
2. Consistency
   Does the fund regularly outperform its peers and benchmark? Use Rolling Return Outperformance Ratio.
3. Expense Ratio
   Higher costs eat into returns. Ensure you're not overpaying for underperformance.
4. Fund Manager Track Record
   Look for experience and long-term consistency across multiple funds.

• Fund A gave 14% CAGR over 5 years but has high volatility (Std Dev 18%).
• Fund B gave 12.2% CAGR but with much lower volatility (Std Dev 11%) and a better Sharpe Ratio.

Summary Table: Fund Comparison Checklist