How to evaluate a mutual fund’s performance?


Investors allocating money to mutual fund schemes are keen about their performance. Since the net asset value (NAV) is declared every working day, it is easy to track their performance over short as well as long-term timeframes.

How to evaluate a fund’s performance?
While past returns are an important parameter to consider a fund, investors must not look at it in isolation. Also, they should not look at the returns on a daily basis, but evaluate the performance over longer periods of time. Investors must give 3- to 5-year time to an equity fund to work out and give returns. They must also compare the performance with that of the peers and also consider qualitative parameters like quality of the fund management team, churn, quality of stocks, and volatility.

How to compare equity mutual fund returns?
Investors need to make the right comparisons while evaluating returns. For example, a large cap equity fund should be compared with its benchmark or another large-cap fund and not with a mid-cap or thematic fund. Similarly, equity as an asset class should not be compared with gold or fixed income. An equity mutual fund gives return based on the performance of the stocks in its portfolio. For example, if an investor holds a large-cap fund which is benchmarked to Nifty 50 TRI, and has given a return of 10% over the last one year vis a vis the benchmark’s 8%, it is considered good as it has outperformed its benchmark. However, if the fund gives a 5% return, it has underperformed. Comparative returns are readily available on many websites.

How to compare with peers?
Investors should see how the fund preformed in comparison with similar funds. If the average return from the large cap category over three years is 20% (annualised) and your scheme has returned 14%, it indicates your fund is not faring well. If there are 10 funds in the category and your fund is amongst the bottom three, and not able to beat the category average, it indicates that there are better funds out there.

How important is it for a scheme to have consistency in performance?
Financial planners believe consistency in performance is an important parameter to consider while investing in a fund. If the fund’s performance is unstable, that it outperforms in bull markets and underperforms in bear markets, it is better to avoid it. A fund should beat its benchmark and category average during all phases in the market. In addition to this, sophisticated investors also look at parameters that evaluate volatility like beta and standard deviation, portfolio turnover and churn while evaluating a scheme. For example, a scheme with high volatility and high churn may give returns but may not suit conservative investors.

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