Mutual funds have emerged as one of the popular investment options among investors. This is because investors find themselves much relaxed while investing in MFs as the money is invested in lots of different sectors so that the fear of losing money has been minimized to a certain extent.
Earlier, investors used to invest in stocks or government securities. People who knew about the stock market only invest in stocks, however, people who had no idea about stocks, preferred to invest in government securities as they found it a better yet safer investment option than stocks.
As time flies, new forms of investments have started to take place. One such investment option is Mutual funds.
What is a Mutual Fund?
A mutual fund is a company that collects money from different people and invests it in stocks, bonds or other securities. Mutual funds are operated by experts which are also called fund managers who put the fund’s assets into different sectors in an attempt to produce capital gain or income for the fund’s investors.
Investors now are taking a huge interest in mutual funds as they are less riskier than stocks. Also, they are actively managed by fund managers who are experts in managing a portfolio, fund allocation and more.
Although there are a lot of investing platforms available now, it’s always good to take a sip of knowledge and market knowledge about how a mutual fund works and how to check the performance of a mutual fund company:
So, how do you measure the current performance of a mutual fund?
A study on mutual funds regarding the performance of a mutual fund reveals that the market share and the change in the market share are the most essential metrics to evaluate a company’s performance.
What are the Top Reasons to Track Investment Performance?
You might have known that the past performance of a mutual fund does not decide the future performance of the same fund. It simply means that you cannot expect a guarantee of ROI from these funds despite having a strong past record. Hence, you need to figure out the other factors that help you to assess the performance of a mutual fund company.
Firstly, you should keep track of your investments so that it will help you to make informed decisions that can lead to higher growth.
There is no need to say that the capital market is volatile which means it keeps fluctuating with the overall economic conditions. These conditions affect the overall asset allocation of the portfolio. For example, the market volatility and continuous changing economic conditions can change the allocation of 50:50 equity-debt to 60:40 equity-debt which can increase the risks of the fund.
Secondly, fund evaluation allows you to compare your investments with similar funds. Hence, a review and balancing may be required to keep the risk profile of the portfolio intact.
Here, we will share all the details about evaluating a mutual fund’s performance:
Evaluating the performance of a Mutual Fund
1. Set Investment Goals
The purpose of investment should be cleared before investing money into a mutual fund. Always set your investment goals before planning any mutual fund for investment. Once you finalize a mutual fund based on an investment goal, it would be better to evaluate the performance of the fund you have selected.
It may be noted that different mutual funds come with different goals. For example, if someone wants high growth in the long term, and has a high-risk appetite, then he/she can choose equity mutual funds. Therefore, it is important to find out your financial goal first and then decide your investment.
2. Shortlist the Peer Funds to Compare
It is difficult to check the performance of a mutual fund in isolation. Hence, it is suggested to make a small list of the best mutual funds in a particular category and compare them regularly among various funds.
3. Look at the Historical performance of the Data
Past performance of mutual funds gives no indicator of its future performance. Now, many mutual funds come with a disclaimer stating that past performance cannot provide the guarantee of a mutual fund’s performance.
Although the above statement is considered true to some extent; the past performance of data can provide you with other relevant information. For instance, the historical performance of a mutual fund allows you to map the fund managers’ performance across different market cycles.
If a fund can give higher returns than the benchmark even during the worst market conditions, you can get a realization about how fair it would be in the future.
4. Monitor the Fee Structure of the Fund
Needless to say, a mutual fund company charges you for its services and expertise, which is further broken down into other components. The fee changes according to your plan you invest in i.e direct and regular.
It may be noted that a fund with a higher fee always performs better than other mutual funds.
5. Take a Tour at Risk-Adjusted Return
Markets are volatile and hence every fund is associated with certain risks. Every mutual fund sets its benchmark and therefore they have been always comparing the set benchmarks. Generating returns more than the set benchmark tells many things about a fund manager. I.e. the ability and strategy of a fund manager like how well he/she performed despite similar risks across several market cycles.
How Often Should You Evaluate a Fund’s Performance?
Everyone knows that the market is highly volatile, but that doesn’t mean that you need to evaluate your performance daily. On average, you should assess a fund every six months to a year.
Evaluating a fund over a shorter period doesn’t give you accurate information about the performance of a fund.
If all this sounds too much, it’s better for you to invest in regular funds.
The key points mentioned in the blog above will guide you to find the right mutual fund that perfectly suits your investment goals. Do remember, always analyze a fund’s performance according to your set financial goals.