How to Judge a Mutual Fund’s Performance?

mutual funds

A mutual fund is a pool of stocks, bonds or other securities that has been divvied up into shares for an investor to purchase. Choosing a mutual fund that is expected to perform well and meet your expected goals is done by thorough analysis and research. The steps to judge how a mutual fund is expected to perform are:

  • Classification-

Firstly, classify the various funds available on the basis of your goals. If it fits your scope, keep it in for comparison with others, if it doesn’t chuck it out. Many companies offer the same type of competitive models of the same type of fund which can be kept in for comparison. Set one as a benchmark and compare others to it.

  • Historical Performance Data-

Collect data of the mutual funds that you have selected and want to compare. Several financial investment tracking websites like Morningstar provide data of the funds over the years along with tools that will help you in evaluation

  • Analyse the Data-

Now, compare the selected funds and their performance data on basis of different parameters. These parameters can include risk return trade off and match it with your own risk tolerance. You can also find rankings and ratings for different funds on historical returns and risk on the websites thus making it easy to compare.

  • Measure Consistency of Performance-

Then, try and look at the individual returns for each year rather than the average returns. Check which fund constantly returns more than its set benchmark. There are some funds that might have fallen tremendously for just one year which might have affected the average return rate gravely but that does not reflect the consistency of the bond. That counts as an anomaly. It could also go the other way around where in the average is affected positively by a skyrocketed price for just one year. Also compare the fund’s upside and downside data against its peer funds.

  • Look at Expenses-

Expense Ratio plays a vital role in the amount of return that you are able to extract from your investment. Actively managed funds might have a higher annual expense as compared to funds that charge a higher management fee. All these costs are to be taken into consideration to maximise the real time return that you get. Only by minimising cost can you maximise profit.

The above steps if followed properly and carefully are sure to help investors in mutual funds to choose the perfect option suited to their goals. But care must be taken as to the nature of the bond and its consistency. After all, shares are nothing if not unpredictable.

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