Though performance of a scheme is an important parameter which helps us to gauge a fund's past performance, its consistency in delivering returns, etc., it is imperative to recognise that it is not the only parameter. Thus, you as an investor should not jump to conclusion about a fund based on its performance only.
Moreover under the performance criteria, we must make a note of the following parameters too:
· Comparisons: It is very important to compare the performance of the funds in the same category so as to arrive at a fund which stands out among its peers. Analysing a fund in isolation is of no relevance. Thus, comparing similar funds is vital before you take any investment decision.
· Time period: When you opt for equity diversified fund for investment make sure your investment time horizon is at least 3 years. Long term investing is the best way to generate wealth. Also, a fund will do well when the stock markets are experiencing euphoria but the core strength of a fund is brought when there is a downturn in the markets. Thus, a fund's performance must be analysed across different market cycles or time periods.
· Returns: Returns are one of the important parameters that one must look at while evaluating a fund. But remember, although it is one of the most important, it is not the only parameter. Many investors simply invest in a fund because it has given higher returns. In our opinion, such an approach for making investments is incomplete. In addition to the returns, investors must also look at the risk parameters, which explain how much risk the fund has taken to clock higher returns.
· Risk: You as an investor must know as to what degree of risk you are exposed to when you invest in a particular fund. This risk in a fund is normally measured by Standard Deviation (SD). A fund with a low SD is preferable to its peer with a higher SD (from the same category).
· Risk-adjusted return: Having a low SD is not enough by itself. A true performing fund will not only keep its SD under check but also generate luring risk-adjusted returns for its investors. This risk-adjusted return is normally measured by the Sharpe Ratio (SR). Thus the SR of your fund will tell you whether it is worth taking risk that level of risk.
· Portfolio Concentration: Whenever a fund clings to limited stocks in its portfolio, the fortunes of the fund get closely linked to those of the underlying stocks. Thus, a fund having a high portfolio concentration is exposed to higher risks than those funds which have well diversified portfolio across sectors and market caps.
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