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Choosing the Best performing Mutual fund need not be as complex as most financial and investment advisers often show. At the time of selecting between various Mutual Funds, you just need to know what factors to look into to analyze and pick the best mutual funds suited for you. Most of those new to investment look at returns, riskiness or ratings of a fund before investing. But all this is based on its past performance. Mutual Funds performance in the past may not be a guarantee of future results There is too much data, that to research and analyze only leads to more confusion.
However, you only need to weigh the best factors and to ignore others.
If you know how to analyze fund performance — if you know what to check and what to avoid — you can make better Mutual Fund Investment decisions. It can increase the odds that Mutual Funds Performance in the future will meet or, even, exceed your expectations.
Analysis of Mutual Funds Performance
mutual funds performance: WealthBucket
Here are a few more performance indicators that will help you take the decision of choosing the best mutual fund. Keep in mind, that the below summary does not mean you neglect the statistical analysis and evaluation of risk metrics. But rather advises that those analyses should be supplemented with a more rigorous process. That would include the fund manager’s skill and value-adding capabilities.
(a) Fund History
The real worth of a mutual fund can be judged correctly only during difficult market phases, and the fund’s history can validate that. Look for a fund that has existed for a relatively long period say 5 to 10 years. Compare the mutual funds’ performance across different time intervals and market cycles.
Let’s say a fund that has delivered performance aligned with the expected returns consistently during a market rally is a good one. Moreover, at the time of the market low, it lost 8% returns. On the other hand, the benchmark lost 10% returns. Then you can easily consider include this fund in your investment plan.
The tenure of the Fund Manager must also be analyzed simultaneously with the fund. What if the fund manager has been with the fund for only a year, while the fund has been going strong since 5-years. The effects would be only beginning to take place. Or the situation may be that the 10-year annualized returns are below average compared to other funds in the category. But the performance of the past 3-year looks attractive. You may consider this fund if the fund manager has been there for those 3 years. This is because the current one should receive the credit for the good performance of this 3-year. But cannot be blamed for the low 10-year return
(b) Benchmark to Compare Mutual Funds Performance
You may start by comparing the Returns from Mutual Funds against the fair and appropriate benchmark. It should always be an apple-to-apple comparison. For instance, if you want to see how well the fund is performing, it’s best to compare it to the average return for funds within the same category.
Applying the wrong measure will only give misleading data.
Take the case of a Large-Cap Equity Mutual Fund. You should ideally compare its performance with a broad-based index like Nifty 500. That is if the fund is a large-cap stock fund, a good benchmark is the Nifty 500. Let’s say the returns for a period were 15% whereas the benchmark returns were only around 12%. If a fund has delivered such good returns consistently, then you should seriously consider this investment option.
(c) Expense Ratio
Mutual funds do not run by themselves. They are managed. And this management doesn’t come free! The expenses to perform the operations of a mutual fund can be as involved as a corporation. Expense Ratio is the fee charged by the Mutual Fund House for managing your money. As per SEBI guidelines, this cannot be more than 2.5% of the fund’s average asset under management (AUM). Expenses are charged out of the fund returns.
You must check the expense ratio of mutual funds before finalizing a fund. Moreover, you need to know is that higher expenses would not necessarily translate into higher mutual fund returns. In fact, the higher the expense ratio, the lower would be your take-home returns. Always look for a fund that offers similar returns at a relatively lower expense ratio.
Most of the Mutual Funds Plans are also available as Direct Plans vs Regular Plan. Direct plans of mutual funds come at a lower expense ratio; which translates into higher returns. Investing in Direct Plans of mutual funds, instead of regular plans, can save you loads on commissions. But for that, you must have the analytical skills and be a veteran in market research.
If returns produced by your expensive fund are not in line with the amount of expense charged, you may try passive investing as well. Look for index funds that suit your budget — these are relatively cheaper and give returns equal to the underlying benchmark returns.
The average expenses change by fund category. The reason for this is that research costs for fund management are higher for certain areas. Such as small-cap stocks and foreign stocks. Here information is not as readily available as compared to large domestic companies. Also, index funds get managed passively. So that the costs can be kept extremely low.
But what expense ratio is best? Which is high? When researching, keep in mind the average expense ratios for mutual funds performance. Here are a few examples:
- Large-Cap Stock Funds: 1.25%
- Mid-Cap Stock Funds: 1.35%
- Small-Cap Stock Funds: 1.40%
- Foreign Stock Funds: 1.50%
- S&P 500 Index Funds: 0.15%
- Bond Funds: 0.90%
Try not to buy a mutual fund with expense ratios higher than these!
(d) Returns
Instead of looking at normal returns, look for risk-adjusted returns of the fund. As per the risk-return proportion, a higher degree of risk should get compensated by a higher level of returns. The risk is measured with the help of various ratios. These may be R-Square, Standard Deviation, Sharpe Ratio, etc.
Using the Sharpe ratio we can ascertain whether the fund is giving higher returns on every additional unit of risk taken. The fund with a Sharpe ratio higher than the category average implies that the fund manager delivered higher returns for the extra risk taken.
Consider two equity funds A and B with a Standard Deviation of 12% and 15% respectively. If the Sharpe Ratio of A and B is 0.48 and 0.60, then invest in fund B. It is a better bet for the risk taken. But if in case the Sharpe ratio for B was around 0.50, then it would have been okay to invest in A also.
(e) Other Ratios to Evaluate Mutual Funds Performance
Compare Mutual Funds Performance with Alpha and Beta Ratios. Alpha Ratio measures the number of extra returns generated by the fund. As compared to the benchmark returns. Beta Ratio measures the risk element of a fund. Moreover, it shows whether the fund has lost or gained than the benchmark. If the Beta value is over 1, it shows that the fund gains/loses more than its benchmark. Beta value of 1 indicates that the mutual fund’s returns move in line with the benchmark. If the Beta is less than 1, then the fund gains/loses less than the benchmark.
Consider two funds A and B which have the same level of Beta i.e. 2. If Alpha of A and B is 2 and 1.75 respectively, then you may go for fund A. Because, for the same level of risk, the fund manager can generate better returns than the benchmark.
(f) Durations
These are primarily used to assess Debt Funds. Average maturity means the period after which the securities held by a Debt Fund will mature. The longer the average maturity, the higher is its sensitivity to interest rate movements. Therefore higher are chances of a fall in the fund NAV because of a rise in interest rates.
Duration means the tenure of how long does each underlying security of the Debt fund takes to reach a break-even point. That is the point of no profit no loss. The shorter the duration, the quicker you will get your original investment back. In such a situation, you will be able to accumulate money to reach your goals.
While investing in Debt funds, the average maturity and duration of the fund should meet your investment horizon.
(g) Portfolio Turnover Ratio
The Turnover Ratio of a mutual fund is to measure the percentage of its holdings that have been replaced (turned over) during the previous year. For instance, if a mutual fund invests in 100 different stocks and 50 of them are replaced in one year, the turnover ratio would be 50%.
A low turnover ratio shows a buy and hold strategy for actively-managed Mutual Funds but it is generally found in passively-managed funds, such as Index Funds and Exchange Traded Funds (ETFs). All other things being equal, the fund with higher relative turnover will have higher trading costs (Expense Ratio) and higher tax costs, than a fund with a lower turnover ratio. Or you can say, lower turnover generally translates into higher net returns.
Some mutual fund types or categories of funds such as bond funds and small-cap stock funds will typically have high relative turnover (up to 100% or more). Whereas index funds and other such funds will have lower relative turnover (less than 10%) compared to other categories.
On average, for all types of mutual funds, a low turnover ratio is less than 20% to 30% and high turnover is above 50%. The best way to ascertain ideal turnover for a given mutual fund type is to make an “apples to apples” comparison to other Mutual Funds performance in the same category average. For example, if the average small-cap stock fund has a turnover ratio of 90%, you may seek to invest in small-cap funds with turnovers significantly below that average mark.
WealthBucket
Analyzing the Mutual fund performance would typically consist of a very basic analysis of the fund’s strategy (growth or value), median market cap, rolling returns, standard deviation. Even breaking down of its portfolio by sector, region and so on. As investors, we often settle for only statistical results without taking into account the underlying drivers of those results, which in many cases can reveal some very interesting details.
If you want to do thorough and complete research, backed by facts, come to WealthBucket. Let us assist you with the best advice and services related to investments. Our services include short term mutual funds, Liquid funds, Debt mutual fund or Large Cap mutual fund. Open your mutual fund account with us & make your money grow exponentially.
Give us a call at +91 9999379929. Or email at contact@wealthbucket.in
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