Performance of Mutual Fund: How to Analyze Mutual Funds

How to Analyze Mutual Fund Performance

From among the first few investment options that we can think of, mutual funds surely make it to that list for most of us. Mutual funds are a great investment option for many of us who want to invest in the market but don’t know enough about investing directly in it or have the time to do it ourselves. In this article, lets understand more about mutual fund investment and its performance.

What is Mutual Fund Perfromance?

Mutual funds are essentially a means of investing in the different types of securities and it is also vulnerable to the risk of the markets. And much like with any investment that is subject to market risk, there’s a little more to be done with them. 

What Should we do After Investing in a Mutual Fund?

After selecting and investing in a mutual fund, one must do reviewing. Reviewing your mutual fund investments is crucial to having a good and healthy mutual funds portfolio. The markets are random and constantly changing, and this affects the performance of our investments. Reviewing your mutual funds means: 

• Checking and analysing the performance of the mutual funds so as to make sure they are on the right track. 
• Over time, mutual funds may under-perform or over-perform. Identifying these investments and taking corrective measures is important

How Often Should Mutual Fund Reviewing be Done?

This depends on the investment time duration of your mutual funds, but nonetheless, reviewing your portfolio does not have to be really frequent.

If you have a long-term horizon, typically longer than 10 years, a yearly or semi-annual review is sufficient. If your investment time horizon is ranging between 3 and 10 years, a Quarterly or half-yearly review can also be considered. Shorter duration investments usually do not require much reviewing, unless it’s a high-risk mutual fund and you need to exit suddenly because of a steep down turn.

How to Analyze Mutual Fund Performance

Now there are multiple ways of evaluating the performance of a mutual fund. The 3 commonly used methods are:

1. Relative Performance with Peer Group:

It is the comparison of the performance of other funds within the same category of the fund you have invested in, and by comparison, see where your mutual fund stands. It gives us an overall idea of how the other funds are performing in the same category as yours and accordingly helps you evaluate the performance of your investments.

2. Benchmark Method:

A benchmark is more like an index on which a mutual fund’s performance is measured. Much like the Nifty 50 index for the stock market is a benchmark for large-cap and index funds. Benchmarks are usually used to evaluate the performance over a long term. A few months of performance against the benchmark holds little significance as compared to a 3-year performance comparison with the benchmark.

3. Performance in Different Market Cycles:

A good mutual fund may fall less in a bear market and bounces back quickly when the market starts showing the signs of recovery. These funds do not require frequent review as they have consistency in their performance.

Additional Read: 7 things new Mutual Fund investors need to know

What You Should Do with Underperforming Mutual Funds?

There may be various reasons for the underperformance of the fund. SOme of the reasons are: 

• Change in the fund manager,
• Change in the fund management technique,
• The sector being hit, and 
• Overall down turn of the market.

Treatment for Underperforming Mutual Funds:

Research about the funds and its sector and understand the performance of your investments. The following actions can be performed after analysis:

• If it is in line with the overall market or the investment style, the fund is likely to get back up when the cycle change.
• If it is in line with the overall market or the investment style, the fund is likely to get back up when the cycle change.
• If the fund has been underperforming for multiple quarters, it is better to research the performance of similar funds and decide to shift to other funds

Mutual funds are a preferred investment option for a large segment of investors. The idea is to pick a good mutual fund and evaluate its performance at regular intervals.

Additional Read: How to Use Mutual Fund Investment for Financial Planning

Conclusion

• Reviewing your mutual fund portfolio is imperative to having a portfolio that gives a good and steady return.
• On an average, a yearly review is considered to be an optimum frequency to review your long term fund investments.
• Two common ways to review the mutual funds are by comparing it with a peer group and comparing it with a benchmark.