Are you skipping the crucial step of analysing mutual funds before investing? If yes, then it’s time to change that. Ignoring the performance of a mutual fund before investing could lead to suboptimal decisions.
While past performance doesn’t guarantee future success, it provides valuable insights into a fund’s potential and its underlying stock selection strategy. When you understand what to embrace and what to avoid, you’re already steering your investment journey in the right direction. Let’s dive into the key aspects of mutual fund performance evaluation in this blog.
Why Analysing Mutual Fund Performance is Crucial
“Mutual funds are subject to market risks”- In relation with AMFI this disclaimer is something we’ve all heard. While mutual funds involve market risks, they offer a disciplined and diversified approach to growing your investments over time.
Understanding a mutual fund’s performance isn’t about eliminating risks but about making informed decisions. An analysis provides a historical snapshot of how a fund has fared and helps you align your choices with your financial objectives. Evaluating performance also helps you adapt to changes in the market, economic conditions, and asset allocations, ensuring your investments stay relevant and productive over time. Read here 4 Ways to Evaluate the Performance of a Mutual Fund to know more.
How to Evaluate Mutual Fund Performance: A Step-by-Step Overview
1. Compare Fund Performance with the Benchmark
Every mutual fund has a benchmark index against which its performance is measured. As per AMFI A high-performing mutual fund consistently surpasses its benchmark over the long term, creating additional returns known as “alpha.”
When you invest your hard-earned money, it’s essential to choose funds that outperform their benchmarks. This comparison serves as a vital initial checkpoint in your analysis.
2. Evaluate Funds Within the Same Category
Comparing mutual funds across different categories is like comparing apples with oranges-it’s simply not effective. To get meaningful insights, compare funds within the same category, such as large-cap funds, small-cap funds, or sectoral funds.
This apples-to-apples comparison ensures that you’re evaluating funds with similar investment objectives and risk profiles, making it easier to identify the better performer.
3. Review External Factors Like Market Cycles
Mutual fund performance is influenced by market and economic cycles. External factors such as interest rate changes, inflation, or global economic trends can impact returns. Read our blog Navigating Market Swings with Confidence to know more.
It’s important to analyse how a fund performs during different market conditions. A fund that remains relatively stable during volatile periods may indicate a well-balanced portfolio and sound investment strategy.
4. Monitor Historical Performance and Risks
Past performance gives an idea of a fund’s consistency over different time frames. However, it’s equally critical to assess the risks associated with the fund. Every fund’s risk profile varies and must align with your own risk tolerance. Striking the right balance between returns and risk is key to sustainable investing.
5. Check Portfolio Diversification
A well-diversified mutual fund reduces risks associated with specific sectors or companies. Reviewing a fund’s portfolio allocation can help you understand whether it’s exposed to concentrated risks or maintains a balanced spread across various asset classes. Read here Why SIP Stands Out as the Effective Investment Method to learn more.
Diversification is a safety net, protecting your investments from significant losses in one area while allowing for growth in others.
Conclusion
Analysing mutual fund performance is a foundational skill for making sound investment decisions. It not only helps you select the best funds for your portfolio but also equips you to navigate the complexities of the stock market confidently.
By focusing on benchmarks, category comparisons, external factors, risk assessment, and diversification, you can develop a comprehensive understanding of mutual funds. This knowledge empowers you to make informed choices, ensuring your investment journey is both rewarding and aligned with your financial aspirations.
FAQ
Quick, blog-friendly answers to common questions.
A Systematic Investment Plan (SIP) is a way of investing a fixed amount in a mutual fund at regular intervals, usually monthly. In real market conditions, SIPs spread your investments across different market levels. When markets are higher, the same amount buys fewer units. When markets are lower, it buys more units. Over time, this can help average the purchase cost.
SIPs can be useful during volatile phases because they reduce the pressure to time the market. You keep investing through ups, downs, and sideways phases with the same routine. Instead of reacting to daily market movement, SIPs help maintain consistency and stay aligned with your objective.
Compounding is when your returns start generating returns of their own. In the early years, growth looks slow because the base is small. Over time, as the base grows, even the same rate of return can create larger gains—this is the “snowball” effect.
The key drivers are time, consistency, and patience. Start early, invest regularly, and avoid interrupting the process. Compounding feels quiet at the start and becomes meaningful when it gets time to work.
Mutual fund investments are subject to market risks. Read all scheme related documents carefully.
