Is your Mutual Fund performing well? How do you evaluate?

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With the rising stock markets, the value of your equity mutual fund must also be going up. Assume your mutual fund has clocked 15 per cent annualised returns. On the face of it, 15 per cent returns look good, as it has obviously beaten inflation. But is this enough? How do you interpret this 15 per cent? Analysing it in isolation is not very helpful. Performance must be viewed on a relative basis. Here is how you can evaluate your mutual fund performance.

Has your fund beaten benchmark?
A mutual fund’s performance should be judged in comparison to the broader markets. And a benchmark helps in doing that. It is a reference point against which a fund’s performance can be compared and analysed. Every mutual fund has a benchmark index for comparison. For instance, Nifty 50 is the benchmark index for Aditya Birla Frontline Equity Fund. If your fund has reported 15 per cent returns and the benchmark has gained 12 per cent over a given period, this implies that your fund has outperformed the benchmark. If your fund reports lower than 12 per cent, then it has underperformed the benchmark.
Has your fund beaten peers?
The next step is to compare your fund performance with its peer group. For e.g., suppose you have invested in a large cap fund, you can compare its performance with other large cap funds. So, if there are 24 funds in the large cap category and your fund ranks in the top quartile (first 6) or the second quartile (next 6), then it has done well. If your fund ranks in the third or fourth quartile, then it indicates there are other better performing funds. You can also compare the fund return with large cap category average, i.e., whether your fund has beaten the overall large cap category or underperformed it by a considerable margin.

How frequently should the mutual portfolio be reviewed?

A mutual fund portfolio can be reviewed quarterly or half yearly.

What if the fund is underperforming after review?

When you compare your fund returns vis-à-vis benchmark and category average, it is as on a date. You may be comparing it with previous quarter or last 6 months or a year. If your fund has posted negative returns, then you need to check whether it has exceptionally fallen or fallen more than the benchmark and category average. Further, underperformance as on a date doesn’t by itself warrant a sell action. It does raise a red flag and you should continue to review it. You need to give your fund some time to perform and bounce back. If you discover that your fund is consistently underperforming, then you can consider to switch to a better performing fund. Personally, my patience level is 2 years. Thereafter, if the fund continues to underperform its respective category average and benchmark, I redeem it and invest in another fund.

In this information age, there are numerous websites and mobile apps which will provide you the necessary information about your mutual fund. You can refer to popular mutual fund websites like Value Research, Morningstar, etc for information. You can also check out the factsheet of your mutual fund on the website of the fund house. It is basically a one-page document that gives an overview of the scheme, its performance and portfolio details. It is best to have little knowledge of your own investments and regularly review their performance.

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