Mutual Funds

How to Analyze Mutual Fund Performance

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Looking for a mutual fund to invest in but having trouble picking the right one? Many investors only look at the returns and the risk level before investing in mutual funds. But there are many other factors you need to consider before making such investments.

This article discusses the different factors that affect Mutual Fund Performance. The tips shared in this article can help you find the best performing Mutual Funds for your portfolio.

Why is it important?

Some people rely on a fund’s past performance to judge if that fund will generate good returns for them. Others check how risky a fund is. But the good past performance of a fund and its low-risk level does not guarantee high returns. So, these factors alone should not influence your choice.

As an investor, you should track the performance of your mutual fund investments. So, before investing your money in any mutual fund, try to understand what you will be dealing with.

Factors that affect Mutual Fund Performance

Benchmark and Fund Performance

The benchmark of a mutual fund is the most important indicator of its performance. Every mutual fund scheme has a fixed benchmark that explains if the fund is meeting expectations.

The benchmark of a mutual fund should be compared with its performance. If the fund meets or exceeds the expectation, it is a safe choice.

Benchmarks are often overlooked, but you should keep your eyes on them. They guarantee good returns.

Performance History of Mutual Fund

Good past performance does not guarantee high future returns. But you should check it to learn how a Mutual Fund performed in past market cycles.

The past performance of a mutual fund shows how it performed during the ups and downs of the market.

The stock portfolio and risk management show the performance history of any fund. Both external and internal elements are important for a fund’s performance.

Don’t skip the Expense Ratio

The expense ratio (ER) is a fee that an investor pays to a fund house for money management. ER covers the organisational and operational expenses of a fund house. The ER of a fund depends on the size of the assets or funds managed by the fund house.

The ER decreases with the increasing value of the assets under management. A higher or lower ER does not guarantee better fund performance. But you should know the fee that the fund house charges for your money management.

Investors often overlook ER, but it is an important parameter. So, compare similar funds to find the best-performing mutual fund. It may offer better returns and lower ER.

Risk measurement for better management

A mutual fund is a group of stocks that are directly related to the stock market. But the stock market is unpredictable and risky. So, mutual funds are subject to market risks.

Thankfully, because mutual funds are diverse and have different categories, objectives, and risk levels, you can choose a fund as per your needs. All mutual funds come with a disclosure of their risk level. So, before investing, check if a mutual fund’s risk level matches your ability to take risks.

Additionally, keep an eye on the Risk-Adjusted Returns (RAR). RAR is the ratio of how a fund compensates for the risks it takes with the returns it generates.

Compare Same Family of Funds

Compare similar funds to find the best-performing mutual funds for yourself. Mutual funds can be divided into many categories. Some of these are:

  • Large Cap Funds
  • Mid Cap Funds
  • Small Cap Funds
  • Hybrid Funds
  • Multi-Cap Funds

For example, if you invest in a large-cap fund, you should compare it with other large-cap funds. Do not compare a large-cap fund with a fund of a different category. Other funds differ in nature, returns, and risk levels; so, such a comparison won’t be helpful.

Know Your Fund Manager

Would you ever give your hard-earned money to a stranger and expect them to keep it safe for you? No, right? The background of the fund manager is another factor that many investors take for granted. But is one of the most important factors.

A fund manager makes all the decisions related to a mutual fund. They and their team are responsible for taking care of the technicals and making all the decisions. They are also responsible for growing your investments.

A little background check on the fund manager wouldn’t hurt anybody. The fund manager’s experience and performance have a lot to do with your investment. A mutual fund’s performance depends on the fund manager’s performance and experience.

Portfolio Turnover Ratio

Portfolio Turnover Ratio or PTR indicates how often the fund manager is making changes in a fund’s portfolio. A fund manager buys and sells assets in a fund to increase its PTR.

The PTR directly affects the fund’s Expense Ratio. High PTR means high transaction fees that ultimately cause the ER to increase. A higher PTR also shows a lack of conviction in the Fund Manager over his strategy.

So, checking the PTR is another important parameter.

To Sum it Up

A mutual fund is the simplest way to multiply your money. Studying a mutual fund’s performance may scare many people at first. This article talked about a few ways to help you analyze the performance. Now, you can find the top-performing mutual funds in India on your own.

As an investor, finding the best mutual fund product is your responsibility. You should keep your financial goals and ability to take risks in mind and find a mutual fund that aligns with your needs. Also, check all the factors that affect mutual fund performance so that you can choose a fund that generates good returns for you.

To know more about mutual funds, visit the Piramal Finance website. It will help you know their products and services, especially credit cards, personal loans and financial calculators.