How to analyse a mutual fund? OR How to evaluate mutual funds?

A mutual fund is a great way in which a person can satisfy or achieve different financial goals like buying a car, buying a house property, retirement corpus, etc. over a period of time.

But choosing the right fund is essential to reach the destination. Selecting the right fund is very important to achieve the goal because it must have an individual risk appetite as well as the target goal but to that, an investor should critically examine the working and performance of mutual funds.

An investor should not do portfolio analysis of mutual funds as he may or may not have the appropriate knowledge and skill to select an individual stock as it is the reason why he is going via mutual funds to invest in the equity markets.

Mutual fund analysis reports can be researched on his website

1. Past performance over a rolling period 

The past performance of a fund does not guarantee future returns, but it can form a good base for the analysis of a mutual fund.

The past performance should be analyzed with different parameters such as with its benchmark and with the category. 

The comparison should be done over a rolling period of time Eg:-3-years, 5-years & 10-years period. A period of less than three years may not justify the reasons for investing in a fund as the short term can be more volatile over the long term period, even three years period may not be justified in some cases.

2. Comparison with the benchmark and the category

Comparison of a fund’s performance with its benchmark is very essential to determine whether to invest in it or not, a benchmark for example in the case of the Large-cap fund can be Nifty 50 and Nifty 100 determining your own benchmark is also an essential benchmark error.

Funds that underperform their benchmark over a period of 3-years, 5-years, or 10-years should not be invested in.  comparison of the fund’s performance with its category is also important as a person invests in a fund by comparing it with its category as the particular category fits this own risk profile.

3. How to study mutual funds performance?

Suppose for example a large-cap fund delivers a 12% return over a period of three years versus its benchmark achieving a return of 15% which means the respective fund has underperformed its benchmark.

If the benchmark during the same period delivers a negative 10% return and the fund delivers a negative 8% return that the fund has outperformed its benchmark.

The performance of a fund should be checked over different economic cycles, whether it provides a good acceptable return during different market cycles against its benchmark and category.

To learn more about the benchmark: What is benchmark index in mutual fund?

4. Fund manager analysis

The fund manager is the jockey to your horse i.e. your money. So he is the ultimate person who is going to determine the faith of your money and its returns so knowing him very well is very important. 

Following are the points which should be analyzed before investing

Education and qualification.

The education of the fund manager should be in the field of finance for example MBA or a CFA

Past performance.

Here the past performance means how the fund managers have performed over a long period of time & during different market cycles

Returns in other schemes.

Many times fund managers manage more than one scheme so analyzing the performance of the other scheme is also important

Skills and experience.

Just like a bottle of wine the older the better, but it should not be a singular characteristic for analysis. He should have experienced different economic cycles during his career.

How to analyse a mutual fund?

5. Expense ratio

Expense ratio is a cost which a mutual fund company to manage a pool of funds.  According to SEBI ( Securities and Exchange Board of India) regulations, a mutual fund company cannot charge an expense ratio of above 2.5%.

The expense ratio of a mutual fund company falls under five categories distribution charges, security transaction fees, management fees, investor transaction fees, and fund service charges.

The expense ratio is a burden on the overall returns which can be delivered by a mutual fund over a period of time. Mutual Fund with a lower expense ratio is more favorable.

Mutual fund schemes are basically word into the direct scheme on a regular scheme under direct scheme and investor is not charge brokerage/distribution charges which overall enhances the overall return of a fund.

It’s wiser to invest via a direct scheme instead of a regular scheme. But an investor should consult with his financial advisor or planner before investing if he doesn’t know anything about the mutual fund or equity investments.

6. Portfolio Turnover ratio

The portfolio turnover ratio simply means how many times a mutual fund manager buys or sells stocks during a defined period of time.

Lower the turnover better it is because if a manager buys and sells stock continuously he will incur transaction charges and other related charges which can be expensive for the mutual fund investor during a longer period of time.

7. Alpha and beta analysis

Alpha simply means the extra return a fund manager delivers over its benchmark.

This return should not be considered for a shorter duration of time as a particular fashion of investing for example Momentum investing can be in trend which may enhance the manager’s return so longer duration of time is best to check whether he is outperforming its benchmark or not.

Beta means the fluctuation in the returns of a fund in relation to its benchmark

The beta of more than one means a fund loses/gains, more/less than the benchmark, and a beta value of 1 means the returns delivered by the mutual fund are the same as that of the benchmark.

Suppose there are two funds  X and Y having the same beta i.e.3. If fund X and Y  delivers an alpha of 2 & 1.75 respectively, then in this case investor should go with fund X. 

Related Topics: What is exit load on mutual funds?


I am not a SEBI registered investment advisor. This article is for information purposes any scheme or company name mentioned here is just for example & not a recommendation. 

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of the future performance of the schemes. 

Categories: Info. on MF

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