How to evaluate the performance of a mutual fund?

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Mutual funds refer to a pool of money that invests in assets like fixed income instruments and stocks. Mutual fund investments require some level of financial knowledge and market awareness. There are some basic methods to evaluate the performance of a mutual fund like studying the historical performance of the fund, fee structure of the fund and check its performance against the index. Though, past performances do not indicate future returns but it primarily helps you in monitoring the performance of the fund and thus helps you in making a correct analysis about it.

Here are a few checks that you can keep in mind to evaluate the performance of a mutual fund:

1.      Compare the relative performance with peers -

It is a minute task to assess the performance of a mutual fund in isolation. One must always, make a list of comparable funds in the same segment and constantly compare them. Moreover, there are many online portals, fintech companies and websites that provide data on the relative performance of various mutual funds. Hence, you can keep a track of the best performing mutual funds and invest in the most suitable one.

2.      Check the risk-adjusted returns -

Risk-adjusted returns refers to calculative returns that your funds make as compared to the risk indicated over the period of time. When compared, some mutual funds drive the same percentage of returns over the same period of time and the lesser risk funds have a higher risk adjusted return.

3.      Compare performance of the fund against the benchmark -

Benchmark refers to the measurement of quality of funds against standard measurements. Every fund has a benchmark and that is used to measure and track its performance. A good mutual fund is the one that beats its benchmark constantly over the long run. When a fund generates higher returns than its expected benchmark, the excess is known as the ‘alpha’ of the fund. Thus, before investing your hard earned money, in any mutual fund, you must evaluate it by comparing it to its benchmark.

4.      Track the expense ratio -

Expense ratio may seem to be a small amount initially but it can take away a chunk of your savings. Expense ratio, is a fee that is charged by the fund house to manage your portfolio. It includes manager fee, distribution fee, transaction fee and other related charges. It is wise to consider these expenses while evaluating a mutual fund.

5.      Track record of the Fund Manager -

A fund manager is an important person who makes investment decisions on your behalf and also does the stock selection in the process. It is highly essential to understand your fund manager’s competence and according to his/her fund management knowledge and ability, you must evaluate the mutual fund. Your fund manager’s past performance and records would be a good parameter to track his/her record and it can turn out to be of great value for your investments.

You should monitor your investments and do a timely evaluation of your mutual funds so that you can make informed decisions that can yield higher returns and maximize your wealth. If you wish to know more about the best mutual funds in 2022 and performance of a mutual fund, connect with mastertrust today!