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Most investors do thorough research and evaluate a mutual fund before investing in it. However, after investing, they do not track the performance of their funds regularly. Tracking the investment at frequent intervals is as important as investing in a fund.

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. However, you may still use these metrics to get an idea of mutual fund performance.

Why and how often should a fund be evaluated?

Primarily, you should monitor your investments to get higher returns. Apart from that, several other reasons warrant a regular evaluation of your mutual fund portfolio. 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. Asset allocation means the proportion in which your money is allocated to different asset classes in the portfolio.

An original allocation of 50:50 in equity & debt may change to 60:40 owing to a market rally. It may increase the risk profile of the fund beyond your requirements.

Hence, a review and rebalancing might be required to keep the risk profile of the portfolio intact.

Yet another reason for fund evaluation is to see the performance of your investment vis-à-vis other similar funds. Additionally, there could be a change in fund manager or fundamental attributes of your fund which may trigger a revaluation.

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.

How to evaluate mutual 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, fund fact sheet shows the performance of all the schemes managed by your fund house including your investment.

You can analyse the performance of equity funds using financial ratios like Sharpe Ratio, Sortino Ratio, Alpha, R-squared and Portfolio Turnover Rate. It is essential that you compare these parameters with the mutual fund schemes in the same category to understand where your fund stands.

The fund’s Alpha gives an overview of robustness of fund manager’s strategies. 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 the similar level of beta.

Expense ratio reflects the value-for-money aspect of a fund. It consists of fund management charges and all the other costs that are involved in fund management. It impacts your ultimate take home returns. You may go for a fund with a lower expense ratio which translates into a higher return giving potential.

It is always advisable to compare the fund performance against the benchmark. The benchmark acts as a standard for the 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.

Additionally, 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 Earning-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. Fund having a high portfolio turnover ratio vis-a-vis lower returns is a bad indicator. Regular high churn in the portfolio is harmful for the future prospects of your investment.

Don’t forget to evaluate the funds from personal goals and investment horizon standpoint.

Debt funds are suitable for intermediate goals like buying a car or planning for an exotic vacation. Equity funds are suitable for long-term goals like retirement planning.

Hence, match the duration of the portfolio with your horizon.

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If you had invested Rs 10,000
every month for last 25 years
in equity funds, you could make

₹ 3.3 Crores
at 15%* annual returns

Rs 30 Lakhs

Rs 3.3 Crores

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