How can investors accurately track and evaluate mutual fund performance?
With a surge of 7.8 million new investors, understanding mutual fund performance is crucial. Investors should track returns using NAV, assess risk-adjusted returns, and consider portfolio turnover. Evaluating equity funds involves comparing them to relevant benchmarks and peer funds over a 3-5 year horizon, while index funds should exhibit minimal tracking error.
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Over the past year, 7.8 million new investors have joined the mutual fund industry, taking the total number of unique investors to 55.9 million. For these investors, the question is: how has my fund performed, and what returns have I really earned? Here's a look at what goes into evaluating mutual fund performance beyond just returns.The net asset value or NAV of a mutual fund scheme is declared on every working day, making it easy to track returns over both short and long periods of time. Investors can either calculate it themselves or use online portals such as fund websites or registrar websites. Investments that are more than a year old should be annualised.Apart from returns, investors also check how much risk the fund is taking. They look at measures of volatility (how much the fund's returns go up and down), risk-adjusted returns (how much return the fund gives for the risk taken), and portfolio turnover (how often the fund manager buys and sells stocks). For example, a fund that swings a lot and trades too much may show high returns, but it may not be the right choice for a cautious investor.If an investor has put money in a large-cap fund, it should be compared with a large-cap index like the Nifty 50 or Nifty 100, or with other large-cap funds—not with mid-cap, small-cap, or thematic funds. For example, if your large-cap fund has delivered 16% while the benchmark index and peer funds have returned 13-15% over a 3-year period, your scheme has done well. On the other hand, if it has earned only 10%, it may be time to relook at the scheme. Financial planners say a fund is considered to have performed well if it beats both its benchmark and its category average. If there are 10 funds in the category and yours is among the bottom three, it indicates there are better options availableThe returns of an index fund should closely match the returns of the index it tracks, after deducting the expense ratio. One key factor to check is the tracking error—the gap between the fund's returns and the index returns. If the tracking error is higher than similar funds, it may be better to switch to a fund with a lower tracking error.Don't judge your equity mutual fund the very next day you invest. Give it a horizon of at least 3-5 years, and allow the fund manager at least a year before reviewing returns. Fund managers usually build portfolios with a full business cycle in mind, so patience is key.
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