How to Analyse and Track Mutual Fund Performance?

Many people consider mutual funds as an essential investment option in their portfolio for building a financial corpus over the long term. However, merely investing money in mutual funds is not enough. Evaluating and tracking its performance over the investment period is equally important. This blog will explain how to track mutual performance and other important details.

How Can You Track Mutual Fund Performance?

Now that we know that tracking a fund’s performance is important, a question may arise regarding how one should measure a fund’s performance. Let us explore this point further. Given below are important points regarding assessing a fund’s performance: 

  • Performance Against Index

The Securities Exchange Board of India (SEBI) has mandated that funds disclose their performance and returns against the benchmark indices across different market cycles. These performances are considered for the Total Returns Index (TRI) benchmark, which denotes the fund’s dividend and capital appreciation returns. 

The returns provided by the benchmark index reflect broader market conditions. When a person assesses a fund’s performance with respect to its underlying index, it helps them to make more informed financial decisions. 

  • Risk-Adjusted Returns

Every mutual fund is subject to market risks. However, the fund manager formulates various strategies to enable the scheme to generate returns against anticipated risks. These returns are known as risk-adjusted returns. People can use it to assess the efficiency of the fund’s returns across categories or even in any particular category.

  • Tenure of the Fund Manager

When someone invests in a mutual fund, they indirectly place their faith in the fund manager. Therefore, not only is it crucial to evaluate the expertise and past performances of the fund manager, but one should also consider how long they have been managing the scheme.

  • Comparison of the Fund

While evaluating a fund’s performance is crucial, one cannot measure this value in complete isolation. This is why it is a good idea to make a short list of similar funds and continuously track their performance. This helps the investor understand how the fund is performing against its competitors.

Also Read: AMFI – Definition, Role, Objective & Importance

Ways to Track Performance of a Fund 

Listed below are the important ways to track a mutual fund’s performance: 

  • Fund fact sheet 

A fund fact sheet denotes basic information about the mutual fund, portfolio allocation, fund manager’s details and the fund’s historical performance. Assessing a fund fact sheet helps people track different aspects of the mutual fund, including its objectives, associated risks, returns and portfolio diversification. 

  • Portfolio composition

Tracking the composition of a fund’s portfolio is a good way to understand how well the fund will be able to perform. Ensure that the underlying securities in the portfolio are quality assets that can weather out short-term market volatilities and generate attractive returns. In addition, it would be a good idea to assess whether the fund’s assets can withstand all market cycles and are in line with your risk profile and investment strategy.

  • Historical returns 

Historical returns of a mutual fund denote its previous performances. Financial experts recommend tracking this data to evaluate the possibility of future returns. This information helps a person to understand the features that determine volatility in a fund’s performance.

Potential investors must remember that analysing a single year’s data will not be sufficient as it fails to capture market fluctuations adequately. One has to compile the annual returns of several years to observe and analyse the pattern of movement of a fund.

However, looking at the previous years’ returns is not a guarantee of the mutual fund’s future performance. 

Also Read: Security Market Line: Meaning, Equation, Features & Assumptions

Financial Ratios to Measure a Mutual Fund’s Performance

There are several important financial ratios that help to measure a mutual fund’s performance and risk levels. These are:

  1. Alpha

Alpha is a ratio that denotes a mutual fund’s performance compared to its underlying index. It denotes the fund manager’s capability in guiding the fund to yield returns.

If the alpha happens to be positive, it denotes that the fund has outperformed the benchmark index. When the alpha is zero, it indicates that the fund is exactly aligned with the underlying index. However, if the alpha is negative, it indicates that the fund is underperforming compared to the index.

Assessing the alpha ratio of a fund enables the investor to understand whether it will be worth investing in a mutual fund or not.

  1. Beta 

This ratio reflects the volatility of a mutual fund’s returns compared to the benchmark index. When beta is one, it denotes that the fund’s returns are the same as the market. If beta is less than 1, it denotes lower volatility compared to the benchmark index. If it is higher than 1, it denotes more volatility compared to the benchmark index.

If an individual tracks the beta ratio, they will understand how volatile a particular fund is compared to the benchmark index. Furthermore, this ratio helps people understand the Capital Asset Pricing Model (CAPM), which indicates the rate of returns of an asset or a particular mutual fund.

  1. Sharpe ratio

This ratio denotes the risk-adjusted returns generated by a mutual fund. In simpler words, it reflects how much return a fund can generate against the risks it takes. A high Sharpe ratio denotes the fund’s potential to generate higher returns. 

It is a very good idea to track the Sharpe ratio to measure the potentiality of risk-adjusted returns a particular fund can generate.

Also Read: Factors Affecting the Performance of Mutual Funds

Why Is it Important to Track Mutual Fund Performance?

Generally, mutual funds come with a disclaimer stating that past performances do not guarantee future returns. While a fund’s past performance may not be the correct indicator of its future performance, it reflects how consistently the fund has performed across market cycles. However, you need to look beyond the previous years’ returns while assessing a mutual fund. 

Primarily, you should monitor your investments to make informed decisions that can lead to higher returns. As the capital market keeps fluctuating with changes in the overall economic conditions, that disturbs the asset allocation of your portfolio. For instance, an original allocation of 50:50 in equity and debt may change to 60:40 owing to a market rally. This change in allocation may increase the risk profile of the fund beyond your requirements. 

Further, fund evaluation also helps you to compare the performance of your investment against other similar funds.

Also Read: Sharpe Ratio : Basics, How to use it and More

How Frequently Should One Track Performance of Mutual Funds? 

There is no rule regarding how often people must track the performance of their mutual fund investments. However, experts recommend that people should at least evaluate their fund’s performance once a year if it is a long-term investment. But, more frequent evaluations are necessary if a person has invested for a short investment horizon.

As per evaluations, one has to rebalance one’s portfolio if necessary. Investors need to note that focusing on quality over quantity is better while rebalancing the investment portfolio. 

Final Word

To conclude, knowing how to track mutual fund performance is very important. In contrast, long-term investors should track their fund’s performance at least once a year, and short-term investors must evaluate it more frequently.

Alpha, beta, and Sharpe ratios are some metrics people need to assess while checking a mutual fund’s performance. However, evaluating expense ratio, historical returns and portfolio composition is also important.

Frequently Asked Questions

What affects the performance of a mutual fund?

The performance of a mutual fund depends mostly on the returns of the securities it invests in, which is dependent on market movements. The fund management strategies that the Asset Management Company (AMC) adopts also affect the returns.

How important is evaluating the risks associated with a mutual fund? 

Evaluating the risks associated with a fund is crucial. This is primarily because every person has their unique risk appetite. Potential investors can use a riskometer to assess risks. It is a graphical representation of the risks associated with a mutual fund, designed as per AMFI guidelines.

Is it difficult to read the fund fact sheet? 

A mutual fund fact sheet contains key information about a mutual fund. One does not require extensive financial knowledge to understand the data as it is designed for the average investor. It clearly explains the pros and cons of a particular scheme with the help of graphical representations.

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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The article may also contain information which are the personal views/opinions of the authors. The information contained in this article is for general, educational and awareness purposes only and is not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision, whether related to investment or otherwise, taken on the basis of this article.