Mutual Funds: How to Assess the Performance

It is crucial to analyse the performance of mutual funds in terms of returns. Here are a few factors to consider in order to understand the performance of a mutual fund. 

Tracking performance with appropriate benchmarks: It is important to analyse the mutual fund performance based on the fund’s returns compared to an appropriate benchmark. A few examples of popular benchmarks include Nifty 50, which comprises the top 50 stocks by market capitalisation. Large-cap funds have the Nifty 50 total return index (TRI) as the benchmark. 

BSE Sensex comprises the top 30 stocks by market capitalisation. As benchmark, large-cap funds track BSE Sensex TRI. 

Then, Nifty Midcap 250 comprises the top 250 midcap stocks. Mid-cap funds track Nifty Midcap 250 as the benchmark. 

Analysing the fund’s alpha and beta: The alpha ratio is the measure where an investor is able to understand the extra returns generated by the fund against its benchmark. Zero is the baseline for alpha in mutual funds. On the other hand, beta measures the risk involved in a fund. One is the baseline for beta in mutual funds. In case the beta is greater than one, the fund gains or loses more than the benchmark. If the beta is less than one, this translates as the fund gains or loses less than the benchmark. 

Comparing the fund’s expense ratio: The expense ratio relates to the fee paid to the asset management company (AMC) and reflects the per-unit cost of managing a fund. The expense ratio is inversely proportional to the asset under management (AUM) of the fund. It is subtracted from the total earnings of a fund before it is distributed to the investors. From the investor’s perspective, an expense ratio of about 0.5-0.75% for an actively managed portfolio is regarded as ideal. Anything above 1.5% is regarded as being on the higher side. 

Allocations in the portfolio of funds: Diversification of assets in the portfolio is crucial to mutual funds investment. A well-diversified portfolio provides better returns considering volatile assets are balanced out with stable ones. The fund fact sheet can highlight the details of the allocated assets in an investor’s portfolio of funds. 

Understanding the past performance with rolling returns: Rolling returns are average annual returns for a specific timeframe with returns taken into account till the last day of the duration. It is akin to a daily systematic investment plan (SIP) for a certain interval, followed by taking an average of the series of returns. It highlights the relative and absolute performance of the fund at regular intervals. Rolling returns showcases how a particular fund performed during the entire duration.