Mutual funds over the past few decades have come across as one of the most popular investment options for both experienced and new investors. With their professional management and diversified portfolios, mutual funds offer an accessible route to gain exposure into the financial or capital markets.

However, before you buy mutual funds, assessing the performance of the preferred mutual fund scheme is essential for making an informed decision. Discussed here are the essential key metrics that can assist evaluate your mutual fund performance and SIP investment effectively.

Why does evaluating mutual fund performance matter?

Mutual fund investments pool money from various retail investors to invest in distinct asset classes such as bonds, stocks and other securities or money market instruments. Assessing the mutual fund’s past performance is essential due to the reasons mentioned below –

Comparative analysis

Performance evaluation enables investors to compare different mutual funds and choose the ones that align with their investment goals and risk tolerance.

Risk evaluation

Different mutual funds come with varying degrees of risk. Evaluating performance metrics helps investors understand the fund’s historical volatility, aiding in assessing the associated risk levels.

Assessing growth potential

The performance of a mutual fund provides insights into its potential to generate returns over time. By evaluating past performance, investors can gauge whether the fund has a history of delivering satisfactory growth.

Steps to evaluate mutual fund performance –

Past performance

To assess a mutual fund’s historical performance, consider the following metrics –

·       Trailing returns

Examine the fund’s returns over various trailing periods, such as 1-year, 3-year, 5-year, and 10-year. This provides insights into its consistency across different market conditions.

·       Compound annual growth rate (CAGR)

This metric computes the average yearly growth rate of the scheme’s net asset value (NAV) over a particular time period. This helps you better understand how your mutual fund investment may grow over the long time period.

Risk-adjusted performance

Evaluating a fund’s returns in relation to its risk is crucial. Look for –

·       Standard deviation

This metric measures the volatility of the fund’s returns. A lower standard deviation indicates lower volatility and potentially less risk.

·       Sharpe ratio

This ratio indicates the excess return earned per unit of risk taken. A higher Sharpe ratio signifies better risk-adjusted returns.

Portfolio composition

Analyse the fund’s portfolio to understand its asset allocation, sector exposure, and holdings. This helps you assess whether the fund aligns with your investment objectives.

Expense ratio

The expense ratio reflects the annual fees and expenses charged by the fund. A lower expense ratio is generally favourable as it minimises the impact on your overall returns.

To wrap up

When considering mutual funds, the key to successful investing lies in making informed decisions. By assessing the distinct performance metrics such as risk-adjusted returns, historical growth, portfolio composition and expense ratios, you can better equip yourself with the parameters required to select the correct mutual funds’ investment plans.

Note that, when considering a market investment, there cannot be a one-size-fit-all approach. Here, your risk appetite level, financial goals and investment horizon must be your vital factors for guiding your preferable scheme choices and investment mode. So, whether you are an experienced investor or just starting to buy mutual funds, performing an in-depth evaluation of the distinct performance metrics is necessary for a well-informed investment decision.


Write A Comment