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How to Check the Performance of your Mutual Fund Investments?

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.

Let’s begin with understanding the basics

Mutual funds are essentially a means of investing mainly in the stock market or debt market securities without you yourself having to purchase the securities directly. This means you do not have to do all the things you would have to, to invest in these securities. A mutual fund essentially does that for you. As an investor, all you have to do is pick a good mutual fund and sit back.

Okay it may be a little more than that. As we mentioned, mutual funds are essentially a means of investing in the different types of securities. What this also means is that a mutual fund 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 than just investing and sitting back.

So, what must one do after investing in a mutual fund?

Well, like most investments, mutual funds also need what is called 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 is important. You may need to sell those that are under-performing and would want to keep those that are performing well.

Now how often should you review it?

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.

Okay so we know why we must review our mutual funds and how often we must review it, but most importantly, how should we review it?

Now there are multiple ways of evaluating the performance of a mutual fund. Today, we’ll talk about 3 commonly used methods.

The first one being, Relative Performance with Peer Groups.

Essentially, it’s 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.

The other method is to benchmark.

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.

Another way to check a good mutual fund is its 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

Now having discussed about analysing your funds, there may be some mutual funds you see are underperforming. What should you do now?

There may be various reasons for the underperformance of the fund.

Some of the reasons include change in the fund manager, change in the fund management technique, the sector being hit, and it may just be an overall down turn of the market.

What you should do is research about the funds and its sector and understand the performance of your investments. Having understood that, you may either hold, or switch your investments.

It is important to understand the reason for the fall. 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.

However, if the fund has been underperforming for multiple quarters, holding on to it with the hope of improving may not be the wisest thing to do. Instead, it is better to research the performance of similar funds and decide to shift to other funds.

To conclude, 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

So, lets recap what we covered today:

  • 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.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Please note, Mutual Funds related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. The contents herein mentioned are solely for informational and educational purpose.

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