How to Analyse a Mutual Fund and Make Informed Choices

There’s no doubt about the credibility of mutual funds, they are one of the smartest and easiest ways to grow wealth. But simply investing and waiting for decades isn’t enough. If you want to maximise your returns, you need to analyse mutual fund performance regularly. Just doing this every few months can keep you ahead of the curve. That’s when you can truly expect your investments to be well aligned with your financial goals and risk appetite.

Analysing investments to track their performance might seem daunting at first, but once you understand what to look for, it becomes much easier. Read on to learn more about how to analyse a mutual fund effectively.

Key Factors for Mutual Fund Performance Analysis

Here are some key factors you can consider when analysing mutual funds performance. 

1. Compare Fund Returns

To analyse mutual fund performance, you can start by comparing its returns over different periods. Try factoring in time frames for 1 year, 3 years, 5 years and since fund inception. Doing so will give a clear picture of how the fund performed during various market conditions. You can then take it a notch ahead and compare it with benchmark indices and similar funds to gauge its effectiveness.

2. Risk-Adjusted Returns

Not all returns come with the same level of risk. Some investments may give high returns but also carry higher risk. Others may offer slightly lower returns but with more stability. That’s where the Sharpe Ratio helps. It shows how much return a fund gives for the risk you’re taking. A higher Sharpe Ratio means better risk-adjusted returns.

3. Expense Ratio

The expense ratio is the annual fee charged by the fund house. A high expense ratio eats into your returns, making it crucial to choose a fund with a reasonable cost.

4. Fund Manager’s Track Record

The expertise of a fund manager plays a major role in mutual fund performance. Check their experience, past track record and tenure in managing the fund. A stable and well-performing fund manager is a good sign.

5. Portfolio Composition

Analyze mutual fund portfolio to see where your money is invested. Look at asset allocation, whether it’s invested in large-cap, mid-cap or small-cap stocks, debt instruments or a mix. A diversified portfolio can reduce risk.

6. Consistency in Performance

A fund delivering high returns for 1 year and underperforming the next isn’t reliable. Look for consistent performers instead of funds that just had a good short-term run.

7. Alpha and Beta Values

• Alpha: Shows how much the fund outperforms the benchmark.
• Beta: Indicates the fund’s volatility compared to the market. A beta of more than 1 means the fund is more volatile than the market.

Checking these factors can give you a complete analysis of how your fund is performing. Once you’re done with this step, you can then finetune them basis your goals. 

How to Analyse a Mutual Fund Based on your Goals

Your choice of mutual funds should align with your financial goals:

• Short-term goals (1-3 years): Consider debt funds for stability.
• Medium-term goals (3-5 years): Balanced or hybrid funds could be a good option.
• Long-term goals (5+ years): Equity funds offer better growth potential.

How Often Should you Review Mutual Fund Performance?

It is highly advisable to regularly review your mutual fund investments. Ideally, analyse mutual fund performance every 6 months to a year. It’s the perfect time frame to gauge the fund’s performance and align it your goals. However, avoid making impulsive decisions based on short-term fluctuations.

When to Exit a Mutual Fund?

• Consistent Underperformance: If a fund consistently lags behind its benchmark and peers, it might be time to exit.
• Change in Fund Management: A new fund manager with a poor track record could impact future returns.
• High Expense Ratio: If the costs keep increasing without better returns, consider switching.
• Change in Investment Goals: If your financial goals or risk appetite changes, reassess your fund choices.

A thorough mutual fund performance analysis is key to building wealth. Keep reviewing your investments and make informed decisions to secure your financial future. And if you ever need liquidity without selling your investments, consider a Loan Against Mutual Funds with Fibe. You can borrow up to ₹10 lakhs instantly. Within 10 minutes, you’ll have funds disbursed in your accounts. It’s one of the best ways to enjoy liquidity against your investments while still earning interest on your mutual funds! 

FAQs

How can I compare mutual funds effectively?

Compare funds based on returns, risk-adjusted performance, expense ratio and consistency. Benchmark them against similar funds and indices to get a clearer picture.

How do I evaluate whether a mutual fund is performing well?

Look at its long-term returns, Sharpe Ratio, Alpha, Beta and consistency. If it consistently outperforms its benchmark with lower risk, it’s a good performer.

How often should I review my mutual fund’s performance?

Review your funds every 6-12 months to ensure they align with your investment strategy. However, avoid frequent switching based on short-term fluctuations and market scares.

Should I exit a fund if its performance declines?

A short-term decline isn’t a major concern. But if a fund underperforms for multiple years and has a high expense ratio, consider exiting.