Performance of Mutual Funds

The performance of mutual funds is measured using different metrics such as returns, risk, and volatility. Here are some of the ways to evaluate the performance of mutual funds:

Returns: The returns of a mutual fund scheme indicate how much money it has earned over a period of time. Returns are usually measured as a percentage of the amount invested. Investors can compare the returns of different mutual funds to evaluate their performance.

Risk-adjusted returns: Risk-adjusted returns take into account the level of risk taken by the mutual fund to generate returns. Metrics such as Sharpe ratio and Sortino ratio are used to measure risk-adjusted returns.

Volatility: Volatility measures the degree of fluctuation in the prices of the securities held by the mutual fund. A higher volatility indicates higher risk and potential for higher returns.

Expense ratio: The expense ratio of a mutual fund represents the cost of managing the fund. A lower expense ratio indicates a more cost-efficient fund.

Alpha: Alpha measures the excess returns generated by the mutual fund compared to its benchmark index. A positive alpha indicates that the mutual fund has outperformed its benchmark index.

It is important to note that past performance does not guarantee future returns. Investors should consider the investment objective, risk profile, and investment horizon before investing in a mutual fund scheme. It is also important to read the scheme information document (SID) and consult a financial advisor before making any investment decisions.

Mutual funds differ in several respects from the underlying investments. The performance of a mutual fund depends on the performance of securities that make up the portfolio of the mutual fund. A mutual fund pools the money of investors and then invests this pool in the designated securities. Once this is done, the investors must understand that the performance of particular scheme will depend on the performance of the underlying portfolio. For instance, a scheme has invested funds in equity shares, and the equity market is booming, then the performance of the scheme is restricted by the underlying portfolio and no scheme can rise faster than is rise in underlying portfolio. Even within a particular category or group of schemes, say Income Scheme, the performance of all mutual funds scheme under that category would not be same. The reason for the difference is the exact holding of portfolio by different funds. What is required on the part of investors is to look at each of the scheme and its underlying portfolio. This will help then to know (i) as to how and where their money is being invested, and (ii) about the risk indirectly taken by them.