What to look for when you go Stock Shopping ?
To answer this question, there is no right or wrong answer, just different approaches. Most people like to look at consistent past returns and buy if the fund is generating Top quartile returns consistently. This approach of just looking at past returns to buy Equity Mutual Funds is prone to accidents as it’s like Driving looking in the rear view mirror. However, there is more to selecting a good equity mutual fund. According to us, A Fund having large cap stocks, with a Beta of 1, generating 12%/annum is a better choice than a Fund having small cap stocks having a beta of 2 generating 18% returns.
While selecting Equity Mutual funds, one should not just look at consistent past returns. What one should really look at is Consistent Risk Adjusted returns. Parameters like Beta, Sharpe ratio are extremely important when selecting equity mutual funds. Along with it, attractive financial ratios like Price to Free Cash flows, Price to Sales, rate of Sales growth, Return of Equity of Portfolio companies further adds an edge in your Scheme selection.
Though, nothing can be a sure shot winning strategy in stock markets, but a sound strategy with high probability of winning will most likely yield rich dividends, if followed with discipline and consistency.