Let's Talk Mutual Funds: A Systematic, Smart Way to Make Them Work for You

by Monika Halan

Once the number or schemes in the top ten grow, use a tighter filter of Rs 1,000 crore as the investments increase in passive funds, and so on.

Step four. We now look at the expense ratios to find lower cost schemes within the group. The cheapest may not be the best because we need to see how well the scheme does in hugging the index.

Step five. Check if the passive fund is actually doing its job. You use a measure called tracking error to find if you are getting index returns or not. You can look for tracking error data on the AMFI site on an ongoing basis.

A scheme with a large AUM, at least five years data availability of various metrics, low tracking error and low expense ratio is just fine. It need not be the lowest since this metric will change with time.

A small piece of advice: plan to never stop working. You can quit a job, but never quit work. It gives you something to do and it generates fresh income.