Simple Ways To Evaluate Mutual Fund Performance

We all invest with certain goals in our mind and believe that the chosen mutual fund scheme will perform in line with the expectations. But, it is not necessary that every single investment will fetch returns that we seek and could even fall out of line. It is one of the reasons why periodic reviews are recommended and considered as the vital part of the entire investing process. 

Also, evaluation of mutual fund performance should not be restricted to just its own historical track record but with other metrics that can bring out a clear picture. In this piece, we will discuss ways to evaluate a mutual fund’s performance and ensure that the underperforming one’s are weeded out of a portfolio at the earliest.

Performance against benchmark

Each of the mutual fund schemes specifies a benchmark, which is commonly an index that serves as a standard for evaluating scheme’s performance. Commonly, benchmarks are widely known indices such as Nifty, BSE Sensex and Crisil Short Term Bond Index, Blended Index etc for debt or hybrid funds. Thus, it is one of the easiest ways to confirm if a mutual fund scheme is performing as compared to its benchmark. If a scheme consistently beats its benchmark then its performing and vice-versa.

Performance against peers

Comparing schemes against benchmarks alone is not good enough as its ranking among peers is also an important aspect. For this, an investor has to look at the category average returns and compare the standing of the scheme in question. For example a blue chip fund will have to fare reasonably against other similar schemes offered by other fund houses. If a scheme constantly lags behind its peers by a substantial margin then it should be considered to be replaced from the portfolio.

Short-term vs long-term

Decision to exit or retain a mutual fund scheme should follow a careful evaluation of it over a reasonable period of time. Usually, short-term hiccups should not bother investors but if the trend continues for a longer duration then a decision on the same becomes imminent. In general, an equity scheme should be evaluated for a period more than one year to three years to draw out any conclusion.

Other things matter

Apart from the above points, there are other factors that could significantly drag a fund’s performance. For example, change of fund manager could impact a scheme as it entails change of investing style and strategy. In such cases, investors should retain caution and assess the performance of fund carefully. At other times, funds tend to underperform when they grow too big in size to manage. Under such circumstances, it is prudent to exit the fund and look for alternatives.

Conclusion

A lot of reasoning is required to gauge a mutual fund’s scheme performance and it cannot be simply tossed away from a portfolio just because it is underperforming. It is best to approach a qualified investment advisor to take stock of things if the review process seems daunting to one, particularly beginners with relatively less knowledge about the functioning of mutual fund.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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