Mutual Fund Performance & Analysis – Fund Historical Performance, Expense Ratio

Updated on:  

08 min read

When it comes to investing in mutual funds, you need to know how to analyze and pick funds that are best suited for you. Most beginners look at returns, riskiness or ratings of a fund before investing. Here are a few more performance indicators that will help you make the right decisions in mutual fund analysis. We have covered the following in this article:

Compare Mutual Fund Performance against a Benchmark

You may start by comparing the performance of a fund against the benchmark. When you compare, use a fair and appropriate benchmark. It should always be an apple-to-apple comparison. Using the wrong yardstick will only give misleading data.

Let’s take the case of a Large-Cap Equity Fund. Compare its performance with a broad-based index like Nifty 50.

Compare Fund history

A mutual fund’s real worth can be understood only during unfavourable market phases, and a fund history can validate that. Look for a fund that has a relatively longer fund history say 5 to 10 years. Compare fund performance across different time intervals and business cycles.

Suppose a fund has delivered a performance in line with the expected returns consistently during a market rally is a good one. Moreover, during a slump, if it lost 8% returns while the benchmark lost 10% returns, then the fund has done well.

Compare Fund Expense Ratio

Expense Ratio is the annual fee charged by the fund for managing your investment. As per SEBI guidelines, the fund houses cannot charge more than 2.5% of the fund’s average asset under management (AUM). You need to check the expense ratio of mutual funds before finalising on a given fund.

Expense ratios are charged out of the fund returns. So, the higher the expense ratio, the lower would be your take-home returns. Always look for a fund that offers similar returns at relatively lower expense ratio.

The same mutual fund is available as a direct plan and a regular plan. Direct plans of mutual funds come at a lower expense ratio; which translates into higher returns. Investing in direct plans of mutual funds, instead of regular plans, can save you loads on commissions.

If returns delivered by your expensive fund are not in line with the amount of fee charged, you may try passive investing as well. Look for index funds that fit your budget — these are relatively cheaper and deliver returns equal to the underlying benchmark returns.

Compare Risk-Adjusted Returns

Instead of looking at just annualised returns, look for risk-adjusted returns of the fund. As per risk-return tradeoff, a higher degree of risk should be compensated by a higher level of returns. The risk is measured with the help of standard deviation.

Using the Sharpe ratio helps to ascertain whether the fund is giving higher returns on every additional unit of risk taken. The fund having Sharpe ratio higher than the category average shows that the fund manager delivered higher returns for the extra risk taken.

Consider two equity funds A and B having a standard deviation, i.e. 12% and 15% respectively. If the Sharpe Ratio of A and B is 0.48 and 0.60, then go for fund B because it’s a better bet for the risk taken. However, if B’s Sharpe Ratio was around 0.50, then you could even have gone for A. It is because a mere 0.02 extra return isn’t worth it for assuming an extra 3% risk.

  You may compare the performance of different equity mutual funds against the benchmark index using the Sharpe Ratio. It helps you gauge the risk-adjusted return of equity funds. Sharpe Ratio may be used as a comparative tool to measure the performance of a mutual fund or a portfolio. It measures the excess portfolio return over the risk-free rate relative to the standard deviation of the portfolio return. Sharpe Ratio Formula: Sharpe Ratio = (Portfolio return – Risk-free rate of return) / Standard deviation of the portfolio. If two different mutual funds offer similar returns the one with the higher Sharpe Ratio has a better risk-adjusted return.

Sharpe Ratio

Inference

<1

Bad

1-1.99

Good

2-2.99

Very Good

>3

Excellent

Let us understand the Sharpe Ratio with an example. You are comparing two different equity funds called Fund A and Fund B to determine which has the better risk-adjusted return.

Parameter

Fund A

Fund B

Rate of Return

12%

10%

Risk-free rate of return

5%

5%

Standard Deviation

6

4

Sharpe Ratio

1.166666667

1.25

Sharpe Ratio = (Portfolio return – Risk-free rate of return) / Standard deviation of the portfolio. Sharpe Ratio (Fund A) = 12% – 5% / 6 = 1.1666. Sharpe Ratio (Fund B) = 10% – 5% / 4 = 1.25 Fund A has a higher expected return as compared to Fund B. However, volatility is also higher. Fund B has a higher Sharpe Ratio as compared to Fund A and has a higher risk-adjusted return. You may choose Fund B over Fund A as it has a higher Sharpe Ratio and a better risk-adjusted return.

Compare Average Maturity and Duration

These are essentially used to evaluate debt funds. Average maturity relates to the period after which the securities held by a debt fund will mature. The longer the maturity, the higher is its sensitivity to interest rate movements and higher are chances of a fall in the fund NAV due to a rise in interest rates.

Duration means how long does each underlying security of the debt fund take to reach a break-even point, i.e. point of no profit no loss. The shorter the duration, the quicker will it return your original investment. In such a scenario, you will be able to accumulate money to reach your goals.

While investing in debt funds, the average maturity and duration of the fund should match your investment horizon.

  You may consider looking at the average maturity of the debt fund before investing your money. It can be calculated using the maturity period of each security in the portfolio of the debt fund. You may find the average maturity expressed in days, months or years. Let us compare the average maturity of two different debt funds to understand the concept. Debt Fund A has three bonds in the portfolio with a maturity period of two, three and five years respectively. The amount invested in the two-year bond is Rs 40,000. It is Rs 20,000 in the three-year bond and Rs 30,000 in the five-year bond.

Bond

Maturity Period (Years)

Amount Invested (Rs)

Maturity Period * Amount Invested (Rs)

Bond 1

2

40,000

80000

Bond 2

3

20,000

60000

Bond 3

5

30,000

150000

Total

90,000

2,90,000

Weighted Average Maturity (Years)

3.222222222

You would find the average maturity of bonds in the portfolio of the debt fund A as 3.22 years. Debt Fund B has three bonds in the portfolio with a maturity period of three, five and seven years respectively. The amount invested in the three-year bond is Rs 40,000. It is Rs 20,000 in the five-year bond and Rs 30,000 in the seven-year bond.

Bond

Maturity Period (Years)

Amount Invested (Rs)

Maturity Period * Amount Invested (Rs)

Bond 1

3

40,000

120000

Bond 2

5

20,000

100000

Bond 3

7

30,000

210000

Total

90,000

4,30,000

Weighted Average Maturity (Years)

4.777777778

You would find the average maturity of bonds in the portfolio of the debt fund B as 4.77 years. Debt Fund B has a higher average maturity of 4.77 years as compared to 3.22 years for Debt Fund A. It is vulnerable to fluctuations in interest rates as it holds bonds of a longer maturity period. However. It could give you a higher return in a falling interest rate regime.

  • The average maturity of the debt fund has an impact on the risk profile and overall return of the portfolio.
  • You may find bond prices and interest rates moving in opposite directions. Moreover, bond prices are sensitive to the interest rate fluctuations in the economy. You find bond prices falling when interest rates rise.
  • A debt fund which has many long-term bonds in the portfolio has a higher interest rate sensitivity, leading to fluctuations in the net asset value. It increases the risk of investing in the debt fund and you would find variability in return as compared to expected return.
  • A debt fund with a longer average maturity is riskier as compared to a fund with a shorter average maturity. However, you may get a higher return from debt funds with a longer average maturity in a falling interest rate regime.

Macaulay Duration and Modified Duration of debt funds:

You may distinguish between debt funds based on the Macaulay Duration and the Modified Duration of bonds in the portfolio. Duration helps you measure the risk of investing in debt funds. Macaulay Durations shows you the time it takes for the price of a bond to be repaid through its internal cash flows. Modified duration shows you how much the NAV of a debt fund would change if interest rates move by 1%. Lets us compare two different debt funds to select the better fund based on duration. You have Debt Fund A with a modified duration of 5.7 years and Yield To Maturity (YTM) of 6.22%. You have Debt Fund B with a modified duration of 3.6 years and Yield To Maturity (YTM) of 6.45%.

 

Modified Duration  (Years)

YTM (Yield To Maturity)

Expense Ratio

Debt Fund A

5.7

6.22%

1.15%

Debt Fund B

3.6

6.45%

1.15%

The modified duration of Debt Fund A is 5.7 years. It means if the interest rates go down by 1% then the NAV of the debt fund will go down by 5.7% and vice versa.

The modified duration of Debt Fund B is 3.6 years. It means if the interest rates go down by 1% then the NAV of the debt fund will go down by 3.6% and vice versa.

Debt Fund A is more sensitive to interest rate fluctuations as compared to Debt Fund B.

(Let’s assume interest rates have gone down by 50 bps or 0.5%)

Return from Debt Fund = YTM + Interest Rate Change * Modified Duration – Expense Ratio.

Return from Debt Fund A = 6.22 + (0.5 * 5.7) – 1.15 Return from Debt Fund A = 7.92%. Return from Debt Fund B = 6.45 + (0.5 * 3.6) – 1.15 Return from Debt Fund B = 7.1%

You would find Debt Fund A offering a higher return as compared to debt fund B if there is a 50 bps change in interest rates.

You may distinguish between debt funds based on the Macaulay Duration and the Modified Duration of bonds in the portfolio. Duration helps you measure the risk of investing in debt funds.

Macaulay Durations shows you the time it takes for the price of a bond to be repaid through its internal cash flows. Modified duration shows you how much the NAV of a debt fund would change if interest rates move by 1%.

Lets us compare two different debt funds to select the better fund based on duration. You have Debt Fund A with a modified duration of 5.7 years and Yield To Maturity (YTM) of 6.22%. You have Debt Fund B with a modified duration of 3.6 years and Yield To Maturity (YTM) of 6.45%.

Compare fund’s Alpha and Beta

Alpha measures the number of extra returns generated by the fund in excess of the benchmark returns. Beta measures the riskiness of a fund. Moreover, it shows whether the fund loses/gains more/less than the benchmark. If the beta value is more than one, it shows that the fund gains/loses more than the benchmark.

A beta value of one indicates that the mutual fund’s returns move the same as the benchmark. If the beta is less than one, then the fund gains/loses less than the benchmark. Consider two funds A and B which have the same level of beta, i.e. 2. If alpha of A and B is 2 and 1.75 respectively, then you may go for fund A. It’s because, for the same level of risk, the fund manager is able to generate higher returns than the benchmark.  

Compare Portfolio Turnover Ratio (PTR)

The portfolio turnover ratio tells you how often the fund manager buys/sells securities in the portfolio. In case of equity funds, it shows the level of trading taking place in the fund. You need to know that whenever an equity share is bought/sold, it attracts transaction charges like the brokerage. span>

Frequent trading going on in a portfolio ultimately increases the expenses and is reflected as a higher expense ratio. It might reduce your take-home returns from the fund. Thus, PTR is an important criterion for fund selection.

While choosing a fund, look for one with a lower PTR. If you want to go for a fund with a high PTR, then check whether such high PTR is being justified by way of higher returns.

How ClearTax can help you

Unless you are an active investor who closely follows the market trends and related metrics, it can be not very easy for you to choose a mutual fund according to the above parameters. ClearTax can help you here by handpicking the most suitable and best-performing investment portfolios for you based on your financial goals.

All Articles

  1. Investors get troubled when the share prices fall, unaware of how they can stay unaffected or minimise the losses. Here are a few strategies to stay afloat in the ear market.
  2. There are various methods by which you can calculate the return from SIP of mutual funds.
  3. Investing in mutual funds to realise long-term goals is certainly recommended by investment experts. But how to cope with long-term investments?
  4. Wherever the corpus of Rs.1 lakh is coming from, you may want to invest this lump sum in mutual funds to gain reasonable returns. However, deciding on the best mutual fund options to invest your money depends on the duration you are willing to stay invested and how much risk you are ready to take.
  5. Bitcoin vs Mutual Funds: Where Should You Invest? A mutual fund is professionally managed and pools money from several investors to buy securities and assets. Read on to learn more about mutual funds.
  6. Some investors fear losses and avoid equity funds but are not happy with just the stable returns on debt funds. This is where hybrid funds come into play.
  7. Small cap funds can offer high returns if they are taken for long term purpose. The market size of small cap funds is very less, hence it takes time for its growth and expansion of market base.
  8. Debt funds have inherent risk associated with it. Know the essential facts to keep in mind while investing in debt funds.
  9. An all-weather portfolio is the one that provides you with good returns irrespective of the market developments.
  10. The "Rule of 72" explains how you can double your money with a given rate of return.
  11. What Ray Dalio, world's Biggest Hedge Fund Manager's has to say on India's economic future.
  12. Robots have become capable of providing investment advisory services to humans looking for simple and effective investment advice, i.e. Robo Advisory Services.
  13. Debt funds are mutual funds that invest a substantial portion of the money in fixed-income instruments like debentures, government securities, etc.
  14. A hybrid or balanced mutual fund is a type of mutual fund which invests across both equity and fixed-income securities. Read here for more.
  15. Portfolio Turnover Ratio gives an insight into a lot of details regarding investment strategy of the mutual fund scheme. Read on to find its other aspects.
  16. ETFs might seem to have a clear advantage over index funds as they come at a lower cost. However, you may not be in a position to track markets.
  17. Liquid funds are mutual fund schemes that invest in short-term debt securities like treasury bills which generate fixed income. Read on to know about the best liquid funds in 2021.
  18. Here is a simple comparative analysis between ETFs and mutual funds so you can make the best investing choices. Read this article to Know more about ETFs vs Mutual Funds
  19. Who doesn't want to be a crorepati? 'Kaun Banega Crorepati' isn't the only way. Explore these investment options that could make you a crorepati in 15 years.
  20. Mutual funds are the best way to secure finances for your retirement. Discover how they can become the backbone of your finances during the golden years.
  21. LIC Mutual Fund - Know about LICMF Schemes, Returns, NAV, Ratings, Statement. Get Complete Data &amp; Analysis for all mutual funds offered by LIC MF in 2021.
  22. IDFC Mutual Fund - Know about IDFC MF Schemes, Returns, NAV, Ratings, Statement. Get Complete Data & Analysis for all mutual funds offered by IDFC MF in 2021.
  23. Axis Growth Opportunities Fund is an open-ended scheme launched by Axis Mutual Fund house. The scheme aims to create wealth over the long run by maintaining a well-diversified portfolio of equity and equity related instruments both in India as well as abroad.
  24. Axis Mutual Fund - Know about Axis MF Schemes, Returns, NAV, Ratings, Statement. Get Complete Data & Analysis for all mutual funds offered by Axis MF in 2021
  25. Learn about the various Kotak Mutual Fund Schemes, Returns, NAV, Ratings, Statement. Get the complete Data & Analysis for all mutual funds offered by Kotak.
  26. The UTI Mutual fund attempts to provide an effective combination of the domain leadership in the capital markets coupled with state-of-the-art technological expertise. Efforts are made to offer investing solution which match the risk-return needs of the clients.
  27. Equity Linked Saving Schemes under the new tax regime have lost their prior tax-free status, but despite these might still be one of the best long term investment options available. Tax free options like PPF and ULIPs do not match to ELSS in generating the returns ELSS can.
  28. ICICI Mutual Funds - Know about ICICI MF Schemes, Returns, NAV, Rating, Statement. Complete Data & Analysis for all mutual funds by ICICI Prudential MF in 2021.
  29. HDFC Mutual Funds - Know about HDFC MF Schemes, Returns, NAV, Ratings, Statement. Get Complete Data & Analysis for all mutual funds offered by HDFCMF in 2021.
  30. Birla Sunlife Mutual Fund - Know about Aditya Birla MF Schemes, Returns, NAV, Ratings, Statement. Get Complete Data & Analysis for all mutual funds offered by BSL MF in 2021.
  31. To make portfolio managements becomes easier for layman investors, we have put together 10 expert tips.
  32. You might have come across a plethora of mutual funds offering various benefits at nominal investment. However, at the first instance, all the funds in a particular category look similar making it a challenge to take a wise decision.
  33. There are multiple options for investment on offer today and this may seem a little confusing for some to decide which plan to pick. While investment plans are dependent on the individual’s risk profile and other factors, there are some investment platforms that are a good way to start your journey
  34. Previously, the long term capital gains (LTCG) made on sale of equity fund units were exempt from tax. However, in the recent union budget, the LTCG on equity funds have been brought under tax umbrella. This is making the investors find innovative ways to tackle this modification.
  35. Kotak Mahindra Mutual Fund house has recently launched a New Fund Offer (NFO) named as Kotak Balanced Advantage Fund. It is an open ended dynamic asset allocation scheme for wealth creation over a long investment horizon.
  36. Axis Mutual Fund house has recently launched a New Fund Offer (NFO) named as Axis Equity Hybrid Fund. It is an open ended hybrid scheme which aims to generate long term capital appreciation along with income over medium to long term horizon.
  37. UTI Nifty Next 50 Index Fund is an open ended equity scheme which aims at replicating/tracking the Nifty Next 50 Index. The scheme attempts to capture market returns, by taking exposure using an index, instead of trying to actively select the stocks. Nifty Next 50 is an index that represents the per
  38. ICICI Prudential Pharma Healthcare and Diagnostics(P.H.D) Fund is an open ended equity scheme which aims to generate long term capital appreciation by investing into equity and equity related securities of the entire spectrum of health-related sub sectors.
  39. SBI Mutual Fund house has recently launched a New Fund Offer (NFO) named as SBI Long Term Advantage Fund-Series VI. It is a close ended equity-linked saving scheme which aims at generating capital appreciation over a period of ten years by investing mainly in equity and equity-related securities.
  40. Treynor ratio is a measure of returns earned in excess of the risk-free return at a given level of market risk. It highlights the risk-adjusted returns generated by a mutual fund scheme. This ratio was given by Jack Treynor thereby expanding the contribution of William Sharpe.
  41. SEBI may instruct fund houses to cut down their expense ratio to 5 basis points from 20 basis points. This comes in the backdrop of already existing fee restraints for fund houses. Read on to explore the implications of this ruling.
  42. Recently, SEBI came up with a regulation on categorisation and rationalisation of mutual fund schemes. It is an effort to bring about uniformity in the functioning of asset management companies (AMCs) and to standardise attributes of mutual fund schemes across specific categories. Read more
  43. Tax Loss Harvesting is an innovative way to save on taxes. By using simple selling techniques, you can bring down the amount of long-term capital gains tax.
  44. Investors face this dilemma of "Growth Investing vs Value Investing". Each of them have pros and cons. Read on to explore which kind of investor you are.
  45. Women are making headway as Smart Investors and there's no denying that. Here's a ClearTax study that states how.
  46. Conservative investors are always concerned about the falling interest rate regime. In the face of it Income Funds Vs Fixed Deposits is relevant discussion.
  47. A mutual fund fact sheet is a basic three-page document that is designed for the purpose of giving an overview of the mutual fund and its performance.
  48. Should one invest in stocks by themselves or invest in mutual funds managed by expert fund managers? Read on to see a comparative analysis of both options.
  49. Corporate bond funds invest significantly in debt paper issued by companies. Read on to know the risks, returns and suitability of these funds.
  50. There are 2 ways to evaluate the return percent of a mutual fund performance in the current market : Trailing and Rolling returns. Read on to know more about them
  51. Capture ratio gives a lot of insight into strategy of a fund manager. The upside and downside capture ratio can be used for selecting the right mutual fund.
  52. Asset allocation by age is important in portfolio management. After all, one size doesn't fit all. You need to allocate funds according to your life-stage.
  53. Reasons to exit mutual fund schemes can be many. The article highlights five major factors which might cause you to re-look at existing mutual fund scheme.
  54. Information Ratio is used to assess the expertise and reliability of a fund manager. It compares the active returns against the market benchmark. A higher IR indicates better performance.
  55. After SEBI changed the guidelines, mutual fund investors are puzzled as to Total Return Index vs Price Return Index: which is better? Read on to find out.
  56. Open and Close Ended funds are a category of mutual funds differentiated on the basis of structure and ease of sale and purchase of units. Read on to know more
  57. Every investor faces this dilemma: Liquid funds vs. Savings Account, which is better? The article gives in-depth insight of the intricacies of liquid fund.
  58. Portfolio Turnover Ratio gives an insight into a lot of details regarding investment strategy of the mutual fund scheme. Read on to find its other aspects.
  59. Value Research Mutual Fund Rating is an important tool in understanding the market nature and making investments wisely. Learn more about it here...
  60. Dividend or growth option, that's the question. Investors get confused while making a choice. However, choosing can be simpler using the guidelines.
  61. New Fund Offer (NFO) can be presented as a highly viable and lucrative investment opportunity. However, to seek the right investment you should have criteria
  62. A comparative analysis of Equity Linked Savings Scheme / ELSS & Unit Linked Insurance Plans / ULIPs based on various parameters: lock-in period,liquidity, tax benefits & returns.
  63. Want to save taxes and wondering which investment to choose. Let's look at two of the options available: ELSS and NPS. Compare between Equity Linked Saving Schemes and National Penison Scheme and choose the best option according to your requirement.
  64. The right equity fund can boost your return on investment to unexpected levels. However, you need to select the right one. Check out some of the criteria.
  65. ELSS vs FD : This article does a comparative analysis of Equity Linked Savings Scheme / ELSS Mutual funds Vs Tax Saving Fixed deposits / FD.
  66. Mutual fund investors can approach the fund company or distributor to redress complaints. Alternatively, they can get in touch with SEBI if not happy with the services by their Asset Management Companies / AMC.
  67. Mutual funds are the best tool to achieve diversification of investments. Find out how you can diversify your portfolio using mutual funds.
  68. It is difficult to pick mutual funds from the many options available to investors. Here is a list of the best mutual funds for 2017 to invest in.
  69. What parameters you should observe to see how a mutual fund is performing. Click here to know more about mutual fund performance and the various parameters which can help you in making wise decisions before investing in a mutual fund.
  70. Small-cap equity funds can be more volatile than other diversified equity funds, but they also have the capability of earning higher returns.
  71. A systematic withdrawal plan or an SWP is a redemption strategy that allows investors to earn a regular income from mutual funds.
  72. A systematic transfer plan is the automatic transfer of money invested in one mutual fund to another. Find out how the benefits of this STP strategy.
  73. Should you invest in a mutual fund via SIPs or a lump sum? SIPs are always recommended for equity funds & even an STP can be considered.
  74. How should a long-term investor invest when the equity markets are at a high? Should you wait for a correction? Read on to find out.
  75. The power of compound interest in mutual funds actually works like magic to help you create wealth.
  76. Indexation helps to reduce the tax on long-term capital gains from debt mutual funds. Here's how indexation works, explained with an example.
  77. Fixed deposits versus debt mutual funds. Why the latter makes a better investment option.