How to Analyze Your Mutual Fund Performance

The primary reason for investing is so that individuals are able to achieve their short term or long term financial goals. If you are good at financial planning, reaching these goals might become easier. However, the best way to determine whether your investments are living up to the mark is by running periodic check-ups. It is better that investors make the most out of digital media to track the performance of their investments rather than relying on someone else. If you have invested in mutual funds and are keen on determining whether the fund(s) you invested in is/are living up to your expectations, you can do so right away.

Analysing the performance of mutual fund investments might help retail investors in concluding whether they are going in the right direction or if they need to rebalance their portfolio. However, if you are new to financial planning or mutual fund investing in general and looking for ideas as to how to analyse the performance of your mutual funds, here are a few tips that might help:

Analyse whether the scheme is performing as per its underlying benchmark

Every mutual fund scheme has a benchmark against which it compares its performance. There are various indexes like the NIFTY50, BSE200, CNX MIDCAP which mutual funds use as their benchmark. If the mutual fund scheme you invested in is performing well and exceeding its benchmark, it means that your investments are paying off at that moment at least. In case the mutual fund scheme you invested in is unable to match the performance of its underlying index, this can indicate a fund’s underperformance. Investors are expected to measure the performance of a mutual fund to its benchmark over the long term. This will give you a fair idea whether the fund has the ability to offer capital appreciation in the long run.

Compare the performance to similar schemes

Another way for retail investors to measure the performance of its mutual fund is to compare the performance of the scheme to other mutual funds that fall in the same category. For example, if you are investing in a children’s fund for building a corpus to secure your child’s future, check for other mutual funds that fall in this same product category. Similarly, if you have invested in an equity fund, compare the performance of that fund with its peers. Doing so might give you an idea whether the entire segment (equity, debt, etc.) is underperforming on whether only the scheme that you invested in is underperforming.

Study the total capital appreciation

Your overall capital appreciation on mutual fund investment is a combination total of increase/decrease in NAV and IDCW earned through these investments over a period of time. Evaluating the overall capital appreciation might give you a fair idea about the potential performance.

Check whether the scheme carries a diversified portfolio

One of the reasons for investors to consider mutual fund investments is because they are considered to carry a diversified portfolio. Depending on the nature of the scheme and its risk profile, a mutual fund invests in various asset types instruments. Investors are advised to make sure that the mutual fund that they are invested in carries a diversified portfolio and that it is not biased towards a particular industry/sector.

Check for the fund’s past performance

Now it is true that the past performance of a mutual fund may or may not reflect on the performance of its future. However, when you do some data research to analyse the past performance of a scheme, it may help you analyse how this particular scheme has performed in various market cycles. It might also help you determine whether the scheme is a consistent performer in the past 5 to 7 years. One must generally opt for a consistent performing fund rather than placing their bets on a top performer.

If the scheme’s investment goal aligns with yours

Last but not the least, investors are advised to make sure that the scheme’s investment goals align with that of theirs. For example, if your ultimate financial goal is building a retirement corpus, then you must invest in a retirement scheme or a scheme that will give you capital appreciation in the long run. No point in investing in debt schemes. Other example; if you are planning to park your money for emergencies or exigencies, then investing in a liquid scheme might be optimum rather than investing in an equity scheme. Hence while analysing a mutual fund, investors are expected to make sure that the scheme holds the potential to live up to their expectations.

Tracking the performance of a mutual fund might not be that difficult after all. But investors are expected to determine their risk appetite before making the final investment decision. That’s because investments made in mutual funds are exposed to market volatility and returns from these investments are never guaranteed.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.