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Evaluating Mutual Funds

Here are some parameters that give you an indication of a fund’s performance



The performance of a mutual fund scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on a weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published. All mutual funds are also required to put their NAVs on the web site of the Association of Mutual Funds in India (AMFI). Investors can access NAVs of all mutual funds at one place. The NAV is the most common denominator which summarizes the entire performance of the fund.



The mutual funds are also required to publish their performance in the form of half yearly results which also includes their returns/yields over a period of time i.e. past six months, one year, three years, five years and since inception of schemes. Investors can also look into other details like expenses as a percentage of total assets as this has an affect on the yield.



In addition, mutual funds are also required to send annual reports, or abridged annual reports, to the unit holders at the end of the year. These contain details of investments made by the fund in addition to the other financial information.



Various studies on mutual fund schemes, including yields of different schemes, are published. Many research agencies publish research reports on performance of mutual funds including ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves apprised about the performance of various schemes of d i f f e re n t m u t u a l funds.



Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity-oriented schemes with the benchmarks like BSE Index, Sector Index, Nifty etc.



The mutual funds are required to disclose full portfolios of all of their schemes on a half-yearly basis. Some mutual funds send newsletters to the unit holders on a quarterly basis which also contain portfolios of the schemes.



Some mutual funds send information about the portfolios to their unit holders. The scheme portfolio shows investments made in each security i.e. equity shares, preference shares, debentures, money market instruments, government securities etc, and their quantity, market value and percentage to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investments made in rated and unrated debt securities, non-performing assets (NPAs) etc.



On the basis of the performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.


It is to be noted that the past performance of a mutual fund may not be a true indicator of its future prospects. A fund launched at a time when markets are low may show comparatively better results vis-a-vis a fund launched when the markets are booming. Moreover, the regularity of dividend payments, amount of dividend payments, bonus issues, and entry/exit charges also affect the performance of a mutual fund.



Ultimately, the performance of a fund would depend on the sector in which its investments have been made, and the stocks in which the investments have been made.



Choosing a Mutual Fund

Some factors you need to analyze before investing in a mutual fund



A mutual fund is a pool of money managed by professional fund managers. Mutual fund managers invest this money in market securities such as stocks and bonds on the recommendations of their research team. Typically, an equity mutual fund invests a large portion of the funds in stocks.



Usually, stock markets are volatile in nature and hence it's difficult to predict the market direction over a short term. Therefore, investors should take into account that investments in mutual funds (especially equity funds) have a certain degree of risk. In general, fundamentally strong stocks give better returns than any other investment instrument over the long term. This is because time provides a cushion to absorb all the short-term market volatility. Therefore, investors should not look at mutual fund investments for quick money in the short term.



The last few years have been quite good for the domestic equity markets. There has been an unprecedented rally in the stock markets and as a result investors reaped huge returns from equity mutual funds. Many equity funds even doubled the investors' principal within one year. These good returns created euphoria in the markets and investors were attracted to equity mutual funds.



From the start of this year, there has been a correction phase in the domestic stock markets. The markets corrected as much as 30 percent from their peak levels in just three months. Mid-cap and small-cap stocks are the worst hit in this market correction. Many mid-cap stocks dropped more than 70 percent from their peak levels. The net asset values (NAV) of mutual funds also came down sharply (especially of those mutual funds with higher beta - co-relation factor with market). Investors who entered near the market peak have lost a significant portion of their principal investment and others have seen a significant dip in their capital appreciation. Investors who invested in mutual funds without a proper understanding of the market forces are finding themselves on the wrong side.



Here are some of basic factors investors need to keep in mind while investing in mutual funds:



Risk appetite

First of all, investors should understand their risk appetite. Investors with low risk appetite should go for blue chip funds and diversified equity funds, while investors with high risk appetite can go for midcap funds.



Investment horizon

Investors should invest in mutual funds with a long term perspective. This way your investments get more time to grow by way of compounding interest. Time also gives a cushion to absorb the risks and hence reduces the risk of loss.



Avoid switching frequently

Mutual fund investors should avoid frequent switching from one fund to another. Switching from one fund to another involves transaction cost.



Realistic expectations

Investors should have realistic expectations from investment instruments. Information quoted in various reviews is past performance. Remember that the past performances of the instrument may not be repeatable.



Analyze performance

Performance of mutual funds is highly dependent on the fund manager, fund house and its equity research team. Investors should do thorough analysis/tracking before making investment decisions. It's not always advisable to invest in a new fund offering (NFO) with a new fund manager as they have no/limited track record.



To evaluate a mutual fund's performance, investors should look for the fund's total returns (dividends, growth, tax savings etc). This information can be accessed from the mutual fund's periodic reports, websites and in various reviews.

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