How to Analyse the performance of a Mutual Fund Scheme

Today, we are living in the age of information. The advent of digital age has opened the world of information by helping investors to analyze the mutual fund schemes available in the market and select the best option as per their preference. However, judging mutual fund on the on basis of NAV or past returns doesn’t makes the scheme best.

Here are some tips to keep in mind while consider the best scheme.

Each mutual fund scheme has an index used as a benchmark to measure performance. Since 2012, markets regulator Securities and Exchange Board of India (SEBI) has made it mandatory for all fund houses to declare a benchmark index in the offer document. There are various benchmarks such as BSE 200, Sensex, Nifty, CNX Midcap, etc. If the returns on your mutual fund scheme are higher than the benchmark, then it is performing well and vice versa.

So, if the mutual fund scheme invests in large-cap funds, then the benchmark is most likely to be Nifty. Now, make sure that you measure the scheme’s performance against its benchmark over a longer time frame; else you may not get the right perspective. It would be a good idea to study the data for a three-, five- and ten-year period. If the scheme is performing inconsistently, it is an indication that you need to exit.

  • Peer Group Comparison
  • You can never compare apples and oranges even though both of them are fruits. Similarly, you cannot compare the performance of large-cap funds with small-cap funds, or banking funds with pharmaceutical funds. So, apart from evaluating the performance of the mutual fund scheme against its benchmark, you should also look at the category average returns.

  • Risk-Adjusted Returns
  • The mutual fund scheme is said to be performing well when it gives better returns than its peers for the same kind of risk taken. This is called as risk-adjusted return. Risk adjusted returns can be measured by looking at ratios such as Sharpe and Treynor. All schemes publish such ratios periodically. Schemes in the same category that are scoring better on these ratios should be considered superior.

  • Importance Of Rolling Returns
  • Rolling returns consider the performance of mutual funds every day, week or a pre-defined period. Usually the performance of the fund in the short-term is affected by the performance of some sectors or volatility in the market. Rolling returns will tell you whether the said fund is subject to fluctuations in a short period or is performing consistently.

  • Diverse Portfolio
  • Keep track of the portfolio history of the mutual fund scheme you have invested in. Ideally, you should do this every three to six months to know that the scheme is not biased towards a particular stock or sector and is in sync with your risk profile and as mandated in the offer or high churn of portfolio. You can get the portfolio history on the websites of fund houses or mutual fund trackers.

  • Change In The Fund Management’s Team
  • It is normal to have changes in the management over a period of time. However, frequent changes in the fund manager may be a red flag. The change in the fund manager often leads to a shift in the investment style. In such a case, it becomes equally important for you to track the changes in your portfolio to ensure that the investment objective has been maintained.