How should an investor monitor his mutual fund performance?
While a mutual fund scheme declares its NAV on every working day, and the returns can be seen on websites and apps, it is not necessary to evaluate its performance daily. Investors must look at it over longer periods of time, like once in three to six months.
How do you view your scheme returns in comparison with peers?
Investors need to check how the fund fares in comparison with similar funds in its category. If the average return from the mid cap category over three years is 18% annualised and your scheme has returned 14%, it indicates your fund is not faring well. It is important for a fund to beat its benchmark and have returns over the category average over longer tenures. If there are 30 funds in the category and the fund is amongst the bottom five, and not able to beat category average over longer tenures of 3/5 years, it indicates that there are better funds out there.
How should one evaluate returns in a mutual fund scheme?
While past returns are an important parameter to consider performance, they must not be looked at in isolation. The data that a large cap fund returned 20% in the last one year does not indicate much. It must be compared with its benchmark and other schemes in the large cap space. Also, one must compare a large cap fund with another one and not with a mid cap or a small-cap fund and vice versa. Similarly, equity as an asset class should not be compared with gold or fixed deposit and vice versa. Returns on equity mutual fund schemes are based on the movement of stock prices in their portfolio. So, for example, if an investor holds a large-cap fund benchmarked to the Nifty 50 TRI, and has given a return of 12% over the last one year, vis a vis the benchmark’s 10%, it is considered good as it has outperformed its benchmark. However, if the fund gives a 5% return, it has underperformed its benchmark. Many online websites enable you to compare these returns with their benchmark. They must also compare it with competition and consider qualitative parameters like quality of the fund management team, its churn, its quality of stocks, and volatility.
How important is the consistency?
Financial planners recommend funds that are consistent in performance. Typically, a scheme should outperform its benchmark in bull and bear markets. In addition to this, sophisticated investors also look at parameters that evaluate volatility like beta and standard deviation, portfolio turnover and churn while evaluating a scheme.
