How to Analyze Mutual Fund Performance?

Metrics to Evaluate a Mutual Fund’s Performance

Before you start analyzing mutual fund performance, it’s crucial to identify your investment goals. Are you looking for long-term growth, income, or a balance of both? A holistic view of your goals will help you choose the right fund, such as equity, debt, or hybrid funds. That said, here are the essential metrics to consider while evaluating a fund’s performance:

1. Compare the Fund’s Performance to that of its Benchmark

The initial step in assessing mutual fund performance involves pinpointing the benchmark the scheme mirrors. Through benchmarking, you can gauge your mutual fund scheme’s performance compared to other market competitors, regardless of their specific investment objectives. The benchmark index could be the BSE Sensex, Nifty 50, etc. You will know about a fund’s benchmark in its factsheet.

If the fund has delivered returns above its benchmark, it has performed well. On the other hand, if it has delivered returns below it, it’s said to have underperformed.

2. Check the Fund’s Historical Performance

This is another crucial metric through which you review the fund’s performance. Look at how the fund has performed over the past 1, 3, 5, and 10 years. This data is often readily available on the fund’s website or from financial news sources.

Remember that past performance does not guarantee how a fund will perform in the future, but it can show how it has fared in different market conditions. For equity funds, looking at long-term performance, i.e., over 5-10 years, is crucial to gauge how the fund has fared.

3. Analyze the Fund’s Risk-adjusted Returns

The risk-adjusted return of a mutual fund is a critical metric that evaluates the returns generated by a fund while considering the level of risk associated with it. In essence, it measures the effectiveness of the fund’s investment strategy by assessing whether the returns adequately compensate for the risks involved.

This serves as a valuable tool for investors to make informed decisions. It goes beyond simply assessing the returns earned and delves into the relationship between those returns and the inherent risks. Doing so provides you with a more comprehensive picture of the investment’s performance.

4. Assess the Fund’s Expense Ratio

Mutual funds come with various fees and expenses, known as expense ratio. Lower expenses typically result in higher returns for investors, so it’s important to choose funds with reasonable fees.

As an investor, examine the expense ratio of the scheme and make a comparison with other schemes within the same category. While a lower expense ratio is desirable, assessing it in the context of the scheme’s returns is crucial. A fund with a higher expense ratio and lower returns is not desirable.

Consider the Fund Manager’s Track Record

A fund’s performance depends a lot on the fund manager. Research the fund manager’s track record and experience. Look for a manager with a consistent and successful history of managing similar types of funds.

A skilled and experienced manager can positively impact the fund’s performance in the long run. Also, examine if the fund manager maintains a steady investment philosophy, demonstrates a history of producing returns, and possesses the skills to navigate various market conditions.

In Conclusion

Evaluating mutual fund performance is crucial in the investment process as it enables you to make informed decisions about which schemes to invest in. If you find it challenging, consult with a certified financial advisor.