Mutual fund performance analysis - know how to analyse mutual funds

As an investor, there are innumerable aspects to consider, while deciding your portfolio strategy. The first step involves deciding how you want to invest. Do you want to invest directly, in equities and the debt market, or should you go with mutual funds? And, once you decide this, you have to understand mutual fund analysis to zero in on the funds best suited for your needs. If you are confused about mutual fund analysis, look no further. We have all the answers you require.

What is mutual fund performance analysis?

For a new investor, and even for experienced ones, mutual funds can be an effective means to build your portfolio and achieve your financial goals. With the varied types of mutual funds available in the market, including equity funds, debt funds and hybrid funds, among others, it becomes difficult to finalise where to invest your hard-earned money. While undertaking analysis of mutual funds, there are various key factors that you should consider, and these are delineated below.

Checklist of quantitative & qualitative factors for mutual fund selection

Your checklist of qualitative factors, when it comes to mutual fund selection, should involve metrics such as your required return rate, risk appetite, liquidity needs and the tax efficiency of the schemes you select. Further, the fund you invest in should also match your investment goals and time horizon, to ensure absolute compatibility. Accordingly, once you have your investor profile in mind, consider the following factors of mutual fund portfolio analysis –

1. Fund history: start with understanding and analysing the track record of the funds most aligned with your investment profile, to arrive at the optimal scheme. You can do this by considering the past performance history of the fund and its background. Focus on how the fund has performed in volatile markets, to gain the best view.
2. Monthly performance: Once you understand its track record, also look at the monthly performance of schemes, even though you may be investing for the longer term, as this figure indicates the consistency of performance. Choose a fund that performs well, in a consistent fashion, as this will ensure the best returns over the longer term.
3. Expense ratio: Most active funds have a higher expense ratio than passive funds, because of the expertise of the fund manager, as well as the frequency of trades. If you want a low expense fund, then a passive fund would be a good option.
4. Risk-adjusted returns: Do not fixate on the absolute returns but rather, consider the risk-adjusted returns ratio as this indicates whether or not the returns are sufficient for the amount of risk undertaken by the fund. It is best to choose a fund with the best risk-adjusted returns, as this will make your choice efficient.
5. Experience: If you choose to go with an active fund, then the experience and longevity of the fund management team becomes extremely important. This is because the performance of your portfolio is based on the decisions taken by these managers. Choosing a scheme with a solid management team ensures strong returns even in volatile markets.
6. Loads: Every scheme would have some exit load or expense ratio linked to it, based on its fund structure. Look at how much the scheme will charge you as an exit load, if you need to redeem your units before the stipulated time. Also look at how much of your money will actually be invested in the scheme’s units, before you take the plunge.
7. Tax implications: Many people invest with the dual goal of earning high returns and saving on taxes. Tally your tax requirements with the tenure and strategy of the fund, to arrive at the option most suited for your needs.
8. Performance: Finally, look at the underlying performance metrics of the fund, by studying the fund decisions taken by the manager. Pick a scheme which has depicted a track record of backing winners and taking solid decisions over the long term, as this indicates the quality of the fund manager heading the scheme.

How to select best mutual funds for higher return

When selecting a mutual fund, do not let high returns be your only deciding factor because the higher the potential returns, the higher the risk would be. Therefore, use the above aspects, and your investor profile, to choose the fund which offers the best possible returns, while being aligned with your needs.

Once you decide where to invest, you can get on your way towards absolute financial stability, in a seamless manner.

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