Mutual funds are a popular investment vehicle to diversify the portfolio and gain exposure to a range of assets. But,
investing in mutual funds involves assuming a level of uncertainty. While a scheme’s prior performance does not
guarantee its future performance, it can provide insight into stocks in the market. Being able to identify what to
steer clear of and what to approach can set you on the right path in the market. So, evaluating mutual fund scheme
performance is crucial for investors in order to make informed decisions.
How to Evaluate Mutual Fund Performance
1. Identify the Benchmark
The first step in evaluating mutual fund performance is to identify the benchmark that the Scheme is tracking/replicating. Comparing the mutual fund scheme’s returns to its benchmark is one of the essential aspects of evaluating its performance. By benchmarking, you can evaluate how your mutual fund scheme is performing relative to competitors in the market, irrespective of their investment goals. The relevance of the benchmark can be determined by analyzing past results and market conditions. However, it's vital to note that past performance is not a reliable predictor of future results and it is unfeasible to envision any future returns because of the uncertain nature of the market and other factors.
2. Analyze Historical Performance
Another crucial aspect of evaluating mutual fund performance is analyzing its historical performance. You should look at the scheme’s performance over different time frames, such as one, three, or five years. It's essential to assess the scheme's performance in both up and down markets to determine its consistency.
3. Examine the Fund's Risk-Adjusted Returns
The risk-adjusted return is the return earned by the scheme after adjusting for its risk. It helps you determine whether the scheme has generated a return that is equivalent to the amount of risk taken.
4. Check the Fund's Expense Ratio
The expense ratio is the fee charged by the mutual fund house for managing the fund. A high expense ratio can significantly reduce your returns potential over the long term. Check the scheme's expense ratio and compare it with other schemes from the same category. A lower expense ratio is preferable, but it is essential to evaluate it in the context of the scheme’s returns.
5. Determine your Investment Objectives
Before investing in a mutual fund scheme, identify your investment goals. Your investment goals will guide your investment decisions. For instance, if you want a steady income and would like to add some stability to your portfolio, you may consider investing in a debt fund. However, if you are looking forward to grow your investments and have a higher risk tolerance, equities may be more suitable.
6. Look at the Fund Manager's Tenure and Experience
The fund manager plays an essential role in a mutual fund scheme's performance. Look for the fund manager's tenure and experience managing the fund. Check whether the fund manager has a consistent investment philosophy, a track record of generating returns, and the ability to navigate different market cycles.
Evaluating mutual fund performance is a critical part of the investment process as it helps you to make informed decisions about which schemes to invest in. Also, it is critical to remember that past performance is not a guarantee of future returns, and you should contact your financial advisor before making any investment decisions.
An investor education initiative by ICICI Prudential Mutual Fund
Visit www.icicipruamc.com/note to know more about the process to complete a one-time Know Your Customer (KYC)requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website(www.sebi.gov.in/intermediaries.html). For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints on https://scores.gov.in if they are unsatisfied with the resolutions given by AMCs. SCORES portal facilitates you to lodge your complaint online with SEBI and subsequently view its status.(http://www.icicipruamc.com/note)(http://www.sebi.gov.in/intermediaries.html) (https://scores.gov.in/)
Mutual fund investments are subject to market risks, read all scheme related documents carefully.