WHAT ARE THE FACTORS TO LOOK AT WHILE EVALUATING RETURNS OF A MUTUAL FUND?
Financial planners believe investors should not just look at returns in isolation, but should look at many other factors while evaluating performance. An important thing would be to compare rolling returns with the right schemes and peers, study expense ratio, look at statistical factors like standard deviation and beta. They should also be looking at fund manager tenure.
HOW SHOULD ONE COMPARE SCHEME RETURNS WITH PEERS?
The right way to look at your scheme returns is to compare it with the benchmark and peers. For example, a large-cap equity scheme’s performance should be compared with the Nifty 50 or Nifty 100 and not with the Nifty Smallcap 250 or other mid- or small-cap schemes. Similarly, returns from equity mutual funds should not be compared with fixed income or gold funds. A largecap active fund must be compared with another peer in the same category. If the average return from the largecap category over three years is 20% annualised and your scheme has returned 14%, it indicates your fund is not faring well. Financial planners feel a fund has performed well when it does better than its benchmark and category. If there are 10 funds in the category and the fund is amongst the bottom three, and not able to beat category average, it indicates that there are better funds out there.
HOW IMPORTANT IS THE EXPENSE RATIO?
An expense ratio measures how much of a fund’s assets is used for administrative expenses. While passive schemes may have a low expense ratio of 25 bps, active ones have a ratio of 1.5-2%. Investors could also look at the track record of a fund house and allow 3-5 years for an equity fund strategy to bear fruit. They must compare a fund with competition and consider quality of the fund management team, its churn, quality of stocks, and volatility
HOW IMPORTANT IS IT FOR A SCHEME TO BE CONSISTENT IN PERFORMANCE?
If fund performance is unstable, or if a fund just outperforms in bull markets and underperforms in bear markets, it is better to avoid it. Sophisticated investors also look at parameters that evaluate volatility like beta and standard deviation, portfolio turnover and churn while evaluating a scheme. For example, a scheme with high volatility and high churn may give returns but may not suit conservative investors.