Mutual funds investment is a smart way to grow wealth. It allows you to make investments at any market condition to gain units based on the NAV value. For investors who don’t want to invest full-time in stock picking, mutual funds are an excellent choice. In addition, it helps young and small investors to leverage the power of money cost averaging with SIP style investments of small amounts. However, investing in mutual funds isn’t guarantee good performance. Experts advise investors to check their investment periodically to ensure fund performance is good and, if not, plan an exit after considering industry performance.
Why do you need to monitor performance?
Mutual funds are a prevalent form of investment where the company collects funds from several investors to create a pool and invest it into different sectors. The profit generated from the investment is distributed among investors.
One common way to select a fund for investing is analysing past performance. But it is not an assurance that the fund will continue to perform at the same rate. Tracking fund performance tells investors when the fund performs suboptimally and, even better, rebalance portfolio allocation. When you don’t track your fund, chances are you are missing growth opportunities.
While managing your portfolio, prioritise quality over quantity, especially when the market condition is unpredictable.
How to evaluate the performance of a mutual fund?
Rebalancing ensures the portfolio earns a good return while maintaining the risk level. It involves reallocating funds to have the right asset mix. Evaluate fund performance based on the following parameters.
Non-performance
A portfolio review helps you identify which assets are non-performing or underperforming. Recalibrate your portfolio based on the assessment and add investment to match your goal.
Benchmark index
Comparing mutual fund returns against market benchmark index is an excellent way to compare performance.
A benchmark index comprises the best-performing stocks in the market, and one can measure the performance of similar funds by comparing the performance fact-sheet. Investors must select funds with a positive alpha, a measure of the fund’s performance against the benchmark index.
Peer performance comparison
Comparing peer funds is a yardstick to decide the effectiveness of your portfolio.
Mutual funds always try to top the ranking in the same category, making it easy to analyse and recalibrate asset allocation for better performance.
Risk-adjusted return
Risk-adjusted return is a measure that allows investors to select low-risk funds from the group.
Risk-adjusted return calculates, the risk of a fund against the benchmark and peer funds that produce the same return on investment. The fund with the lowest risk ratio has the highest risk-adjusted return.
Stock Quality
The quality of the stocks in a portfolio is indicative of the fund’s ability to produce a good return. Qualitative analysis of stocks and historical performance will help you evaluate the performance of a scheme, which suggests that funds with quality stocks are likely to outdo other funds in the long run, especially during a volatile market.
Performance of fund managers
They are the people responsible for actively managing the portfolio. The fund’s performance depends primarily on the fund manager’s decision-making abilities. Looking at the record of your fund manager could turn out to be of great value in determining the future performance of the fund.
How Often Should You Monitor Fund Performance?
There is no standard rule as to how often one should monitor fund performance. But one must review fund performance at least once a year in case of long-term investment and more frequently during short-term investment periods.
Conclusion
When it comes to evaluating the performance of mutual funds, reviewing it makes a considerable difference to the outcome. It is entirely up to the investors how often one wants to check their investment. However, we suggest at least once or twice a year and readjust the goals is a good idea. But one should also be able to look away from short-term market volatility and focus on the long-term goal.
