How to Evaluate the Performance of a Mutual Fund ?

Updated on: Jan 13th, 2022


12 min read

Mutual fund investments call for some level of financial knowledge and market awareness. Here, investors have two choices. Either buy a regular fund from any intermediary or conduct prolific research to invest directly. But an investor’s responsibilities do not end after that. It would help if you also kept an eye on how the fund performs in the market.

How to Evaluate Mutual Fund Performance

Define the Investment Goals

What is the purpose of my investment? Answer to this should be the foundation of your mutual fund choices. For instance, if you want a regular income with capital protection, you can choose to invest in a debt fund. However, if you have a higher risk appetite and an aim to build your wealth, equities will suit your purpose. So it is crucial to define your financial goal first and then decide your investment. This also has a pivotal role in fund evaluation.

Shortlist a few peer Funds to compare

It is difficult to assess a mutual fund in isolation. So, you should always make a small list of comparable funds and continuously compare them. There are many FinTech firms and third party websites that offer free mutual fund screener tools.

Check the historical Performance Data

Now every mutual fund handbook comes with a disclaimer stating that past performance is no indicator of future performance. However, this data can help you check how the fund has fared across different market cycles. Consistency can also shed light on the skill of the fund manager. In short, it will be easier for you to find a fund with lower risks but higher returns.

Fee Structure of the Fund

A mutual fund company charges you for its services and expertise. Some funds require deft management and quick decisions on whether to buy, sell or hold on to an asset. Please remember that a fund with a higher fee is automatically better. Do check out other parameters too before choosing.

Risk-Adjusted Returns

Every fund expects certain risks related to the market and the industry. When fund strategies in such a way that they make more returns against anticipated risks, we call them risk-adjusted returns.

Performance against Index

Indexes like Nifty, BSE Sensex and BSE 200 set benchmarks, and all fund performances are evaluated on this basis. Comparing different timelines against the benchmark as well as peers, can be insightful. A well-managed fund won’t fall too hard during a market low.

Why track the Investment Performance

You might have seen the disclaimer that past performance does not indicate the future performance of a fund’. It means that you cannot expect guaranteed returns on investment. Therefore, you need to look beyond the previous years’ returns to assess a mutual fund.

Primarily, you should monitor your investments so that you can make informed decisions that can lead to higher returns. You know that the capital market keeps fluctuating with changes in the overall economic conditions. Such a change disturbs the asset allocation of the portfolio.

For instance, an original allocation of 50:50 in equity and debt may change to 60:40 owing to a market rally. It may increase the risk profile of the fund beyond your requirements. Fund evaluation also helps you to compare the performance of your investment against other similar funds.

Additionally, a change in fund manager or fundamental attributes of your fund may also trigger an evaluation. Hence, a review and rebalancing might be required to keep the risk profile of the portfolio intact.

Mutual Fund

How often to Evaluate Fund Performance

The market is subject to fluctuations. However, that doesn’t mean you need to assess the fund performance daily. Ideally, you should evaluate your fund every six months to a year, depending on the tenure of the investment. Evaluating the funds in a shorter period does not give an accurate insight into the performance of your investments. If all this sounds too much, you may invest in regular funds. As qualified intermediaries, they advise you to invest in funds based on your financial goals and risk profile.

Financial Ratios & Fund Performance 

While you may have taken due diligence and advice before investing, you still need to track the performance of your funds. The easiest way to do it is by using the fund fact sheet. In simple terms, the fund fact sheet shows the performance of all the schemes managed by your fund house, including your investment. You must compare these financial ratios with the mutual fund schemes in the same category to understand where your fund stands.


The fund’s Alpha gives an overview of the fund manager’s skills and strategies and how they fared in the past. It should always be higher than the expense ratio of the fund. Additionally, your fund’s Alpha needs to be higher than the peers, which are at a similar level of beta.

Expense Ratio

This is essentially the fee for the fund house for managing your mutual fund. Expense ratios reflects the value-for-money aspect of a fund. It consists of fund management charges and all the other costs related to that of fund management. It impacts your ultimate take-home returns.


It is always advisable to compare the fund performance against the benchmark. The benchmark acts as a standard for funds’ performance. If your fund is outperforming the benchmark consistently, it is a sign that the fund is doing well. You can also compare the average return during a specific time frame with its peer funds in the same category.

Portfolio Holdings

Look for considerable changes and probable overlapping in the portfolio holdings. The fund needs to hold good quality stocks which have a lower Price to Earnings-per-share (P/E) Ratio vis-a-vis Price to Book Value (P/B) ratio. Additionally, ensure that the fund is investing as per its investment objective. For instance, fund having a high portfolio turnover ratio vis-a-vis lower returns is a bad indicator.

Sharpe Ratio

This ratio shows how much extra return you receive for the additional risks you undertake. It is a rule of thumb that higher risks must be compensated more. Moreover, you deserve a reward (excess returns) for the added volatility. Sharpe Ratio tells you how much exactly that reward should be.

In short, consistency says a lot about performance. If you think that doing all this research and analytics is beyond you, you can always invest with ClearTax Save. With hand-picked funds from the top fund houses in the country, you are in safe hands.  

Frequently Asked Questions

Which are the best mutual funds to invest in India?

You may consider picking the best mutual fund depending on your investment objectives and risk tolerance. You could check the track record of the mutual fund house and the fund manager before investing in the mutual fund. However, you may invest in the mutual fund only if you are comfortable with the investment style of the fund manager.

You must check the expense ratio before putting your money in the mutual fund. You may find the best mutual funds having a lower expense ratio. However, you must check other important parameters before investing in the mutual fund. You would find the best mutual funds have a lower turnover ratio for the portfolio. You may avoid mutual funds where the fund manager churns the portfolio many times.

You may pick the best mutual funds depending on your investment horizon. You could invest in equity funds only if you have an investment horizon of three years or more. You may invest in debt funds for a shorter time horizon of under three years. Invest in balanced or hybrid funds only if you have an investment horizon of three to five years.

You may measure the performance of mutual funds against a benchmark index to select the best mutual funds. For example, you may check the performance of a large-cap fund against the Nifty 50. Compare the performance of the mutual fund against its peers and also take a look at the consistency of performance. Best mutual funds have a consistent track record of outperforming peers and the benchmark index over five years or more.

You must choose the best mutual fund house with large assets under management (AUM). The fund house may be able to bear sudden redemption pressure if it has large assets under management.

How to find the best performing mutual funds in India?

Best performing equity fund:
An equity mutual fund may be the best performer in its category if it consistently beats the benchmark index over some time. The best performing equity fund has a lower expense ratio as compared to peers. You may find the best performing mutual funds doing well across market cycles.

You must check the alpha of the equity fund to identify the best performing mutual fund. It shows the excess return generated by the equity fund above the benchmark index. You can pick the equity fund with a high alpha as compared to the peers.

You must take a look at the beta of the equity fund. It gives you an idea of the volatility of the fund as compared to the benchmark index. An equity fund with a beta less than one is less volatile as compared to a fund with a beta more than one.

Take a look at standard deviation which gives you an idea of the volatility of the equity fund. You may find an equity fund with a higher standard deviation to be riskier as compared to a fund with lower standard deviation. You may pick the best performing equity fund based on risk-adjusted returns. Check the Sharpe’s ratio of the equity fund and opt for an equity mutual fund scheme with a higher Sharpe’s ratio which signifies a higher risk-adjusted return.

Best performing debt fund:
You may consider picking the best debt funds based on the credit quality of the bonds in the portfolio. Credit rating agencies would assign a credit rating to bond-issuers based on their ability to repay the principal and interest amounts. You must invest in debt funds with AAA-rated bonds in the portfolio.

It is a safer investment as compared to bonds of a lower rating which may offer a higher interest rate. However, they could default on both principal and interest payments.

You may select the best performing debt fund based on the expense ratio. You must not pick a debt fund with a high expense ratio. Best debt funds have an excellent track record of performance over three to five years. You may select the best debt fund where the average maturity period matches your investment horizon.

Best performing hybrid fund:
You could pick the best performing hybrid fund with a good track record of performance over three to five years. Select a hybrid fund which has beaten the benchmark index and peers over some time.

You may check the track record of the fund house and the investment style of the fund manager before picking the best performing hybrid fund. Pick a fund house with huge assets under management which can bear the sudden redemption pressure of big investors.

Select the best performing hybrid fund with a low expense ratio. A high expense ratio may eat up the return from the fund. The best performing hybrid funds must match your investment objectives and risk tolerance. Take a look at the portfolio of conservative hybrid funds. It gives you an idea on the credit quality of bonds in the portfolio.

Which is the best way to buy mutual funds in India?

You may buy mutual funds through cleartax invest. Follow these steps to invest in mutual funds.

  • You must log on to cleartax invest
  • You then select the mutual fund house from the list of fund houses
  • Select the mutual fund scheme based on your investment objectives and risk tolerance and click on Invest now
  • You must select the amount you plan to invest in the mutual fund scheme and the mode as either One Time or Monthly SIP.
  • You must fill up the requisite details such as name, email ID, mobile number and complete the transaction.

Complete your KYC (Know Your Customer) before investing in a mutual fund scheme. You must visit the website of a KRA (KYC Registration Agency) and create your account. You will have to fill the KYC registration form with details such as your name, email ID, mobile number and so on.

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Quick Summary

Investors must define goals, shortlist funds, check performance data, evaluate fee structure & risk-adjusted returns. Monitoring investment performance supported. Regular fund vs. direct investment pros and cons explored.

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