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What Are Parameters To Evaluate Mutual Fund Performance

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As per AMFII data, the Asset Under Management (AUM) of mutual funds in India grew by Rs 38.45lakh crore in the year 2021. That’s over 30 per cent if you compare December 2020’s data that was Rs. 31 lakh crores. This only speaks volumes of the kind of traction mutual fund investments in India are getting year after year. These days, investors prefer mutual funds over conservative investment avenues. They are also preferred by those who want to invest in stocks but fear exposing their hard earned money to the dangers of direct equities.

Of the total capital that is pooled in by AMCs, most of it comes through the Systematic Investment Plan (SIP) route.

If you are planning to invest in mutual funds, have you decided whether you want to do it directly and save commission fees or do you intend to do it through a broker to save yourself from the nuances of modern day mutual fund investing? Whether you set up monthly auto payments or make manual investments, as investors it is your duty to track the performance of your mutual fund investments.

Here are a few parameters on which you can evaluate mutual fund performance –

 Have a defined set of goals

Are you completely aware of the reason behind making the mutual fund investment? If you have a short to medium term investment horizon and are looking for a mutual fund that offers low but stable returns, then debt funds are you. On the other hand, if you have a very high risk appetite and are willing to remain invested for the long run, then you can consider investing in equity funds. Based on your goals you can decide what type of mutual fund is ideal for you.

Look at the scheme’s past performance

Every mutual fund Scheme Information Document (SID) has a statement issued that goes by “Past performances of the scheme may or may not be sustained in the future. ” To some extent, it is true as mutual funds investments are subject to market risks and returns are never guaranteed. However, upon looking at the scheme’s past performance, an investor can gain insight into its management. Any management that can get the mutual fund to generate consistent returns is creditworthy management with whom you can trust your money. Do not think of the short term when investing in mutual funds. Investing in a highly rewarding scheme must not be your goal, you must invest in a scheme that has historically given consistent returns.

 Total Expense Ratio (TER)

Since mutual funds are a pool of actively managed funds, the AMC charges investors with an expense ratio for offering services like risk management and portfolio management. This expense ratio is to cover recurring expenses such as administrative, operational, and management charges, etc. These charges are recovered from investors through the expense ratio. Investors must understand that investing in a scheme with a high expense ratio can affect their long term capital gains.

Compare the funds within its peers

Now, remember that there are thousands of mutual fund schemes to choose from. Hence, investors should carefully collate multiple schemes under the same category to compare and evaluate when making an investment decision. This will not only help you understand which mutual fund scheme is ranking better than its peers, but shortlisting schemes may help them narrow down and make an informed investment decision.

Since investors cannot expect the mutual fund scheme to continue its current run forever, they need to evaluate their mutual fund investments periodically to ensure that their investments stay aligned with their financial goals.

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