How do you evaluate mutual funds’ performance?


You need to monitor your investments to make informed decisions

Knowing one's own financial goal and risk appetite is the foundation

Mutual fund investments require some level of financial knowledge and market awareness. Investors either have to buy a regular fund from any intermediary or need to do market research to invest directly. But it doesn’t mean as an investor your job is over. It is highly recommended to follow how the fund is performing in the market in a certain period. It is called the evaluation of mutual fund performance. Evaluating mutual fund performance requires keeping in mind some specific points. Here is a brief discussion.

Why do you need to track the Investment Performance?

You need to monitor your investments to make informed decisions that lead to higher returns. The capital market keeps fluctuating with the changes in the overall economic conditions, which in turn increases risks. Therefore, it is highly over-optimism to expect guaranteed returns on investment. Fund evaluation helps to compare the performance of your investment against other similar funds. The change in fund manager or changes in fundamental attributes may require an evaluation of funds. Thus a review and rebalancing help to earn the higher returns keeping the risk profile of the portfolio intact.

How often should you Evaluate Fund Performance?

As an investor, you know that mutual fund investments are subject to market fluctuations. But it doesn’t mean that you need to assess the fund performance every day. Ideally, one should evaluate fund performance every six months to a year, depending on the investment tenure. Evaluating funds for a shorter period does not give an accurate picture of the performance of your investments. Otherwise, you may invest in regular funds based on your financial goals and risk profile.

How to Evaluate Fund Performance?

Set your investment goals first

Knowing one’s own financial goal and risk appetite is the foundation of choosing mutual funds. If you want a regular income, keeping capital intact, you can select a debt fund. However, if your goal is to build wealth with high-risk tolerance, equities will be best. So first, define your financial objective and then decide your investment. It also has a pivotal role in fund evaluation.

Use Benchmark

The benchmark acts as a standard for measuring performance, and benchmarking is the measurement of a fund’s quality against the standard measurements. In mutual funds, the benchmark helps you to measure the performance of your investment against the market competition. It is a reference point to compare the average return of a fund during a specific time frame with its peer funds in the same category. If you find your fund is outperforming the benchmark consistently, it means that the fund is doing well. The historical returns of funds against the market conditions help you determine the relevance of the performance benchmark for your investments.

Relative Performance of a few Peer Funds

You should always make a small list of comparable peer funds belonging to the same category and continuously compare their performance. Comparing the relative peer performance is recommended to find a fund with a higher return for the determined period of value learning.

Historical Performance Data

You may find a disclaimer in the mutual fund handbook stating that past performance is not a reliable indicator of future performance; still, this data may help to check the performance of funds across different market cycles. The consistency in the performance of a fund can help to find a skilled fund manager and also a fund with lower risks but higher returns.

Risk-Adjusted Returns

There are always certain risks related to the market and the industry. When a fund makes a calculated return against anticipated risks over a certain period, it is called risk-adjusted returns. Among a couple of mutual funds that earn the same percentage of returns over the same period, the lesser risk funds said to have a higher Risk-Adjusted Returns.

Quality of Portfolio Holdings

The quality of funds in the portfolio determines the returns on capital invested for a specific period. It is wise to check the position of the mutual fund in terms of industry leadership. The quality of the funds would be reflected in returns as well as in the performance. Qualitative statistics and the historical performance of mutual funds help in the evaluation of the performance.

Track Record of the Fund Manager

A well-managed fund hardly falls too hard during a down market. Your fund manager who makes investment decisions and selects stock in the portfolio is very vital for your fund. Try to understand the fund management knowledge and ability of your fund manager. The past performance of your fund manager would be an excellent parameter to track his/her competence that, in turn, could be of great value for your investments.

Fee Structure of the Fund

An asset management company or fund house charges a fee for managing funds and providing services and expertise from investors. Expense ratios reflect the value-for-money and consist of all costs related to funding management. It ultimately impacts your take-home returns. A fund with a higher fee often found performing better. However, other parameters need to be considered, too, before choosing the fund.

Therefore, evaluating returns of the scheme require investors to compare it with the benchmark that the fund has set. The consistency in performance is what financial planners believe a critical parameter to consider for prospective investors looking for investment in mutual funds.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”, so let me do Nivesh / Enquire