There are a plethora of options available nowadays for investing your hard earned money to earn great returns. Some modes of investments include property, land, gold, shares, mutual funds and much more. You can invest in any one of them or even multiple ones if you feel the need. However, it is quite important to know and understand all the dynamics that are associated with these options. Doing so will let you know the pros and cons of making investments in them while also helping you in deciding the amount you wish to invest and the time period for these investments!
This article discusses the various parameters against which you can do a quick performance analysis of the mutual fund you wish to invest in.
1.Performance History
One of the first things that need to be done is to analyze the performance of the mutual fund in the past. This can help you easily understand the trend that it has shown in the past and the amount of returns and profits it was able to deliver to investors.
The performance history of the past 5 or 10 years must be analyzed to get a better insight into the mutual funds’ performance. Comparisons and deductions must be made of its performance in different business cycles and time intervals.
2.Risk-Adjusted Returns
Risk-adjusted returns are returns that are generated over time by risk-free assets, for example, a government bond or a fixed deposit. Therefore, while looking at mutual funds, you should look for the risk-adjusted returns that the fund offers. Note that higher risks need to be compensated with a higher return amount.
For checking the ratio of returns gained on additional risks taken, the Sharpe ratio is used. If the Sharpe ratio of a mutual fund which is higher than the average indicates that it delivers higher returns on additional risks.
It is calculated by the following formula:
Sharpe Ratio = (Average fund returns – Risk-Free Rate) / Standard Deviation of Fund Returns
3.Expense Ratio
The fund expense ratio is the fee charged by the fund to manage your money, on an annual basis. A fee of more than 2.5% of the fund’s average (AUM) Asset Under management cannot be charged as per the SEBI guidelines. Therefore before choosing a mutual fund scheme, you should look at its expense ratio.
The expense ratio fee is charged on the returns that are received from the funds. Therefore, keep in mind that the lower the expense ratio, the more returns can be collected.
4.Portfolio Turnover Ratio (PTR)
PTR tells you the frequency with which the buying and selling of securities are conducted by the fund manager. Where equity funds are concerned, PTR shows the amount trading that takes place with the fund. The more frequent the trading, the more the expenses. This results in a higher expense ratio.
Therefore, you need to pay attention to the Portfolio Turnover Ratio that is associated with the mutual fund. The lower the PTR the better. However, if you do opt for a higher PTR, then make sure to check whether such a higher ratio is valid with respect to higher returns.
5.Average Duration and Maturity
The duration of the mutual fund refers to the time that every underlying security of the mutual fund takes to reach the no profit no loss area, i.e., the break-even point. If the duration is short then it means that you’ll receive returns for your investment sooner.
The maturity of a mutual fund is used to evaluate the debt funds. The maturity period relates to the time it will take for the security held by the fund to mature. If the maturity time is longer then it means that fund has a higher sensitivity to the movements of interest rates.
All the above points discuss the parameters against which you can analyze the performance of the mutual funds that you are interested in.
