What are parameters to evaluate mutual fund performance

A mutual fund might be a popular investment tool among today’s youth as well as among seasoned investors, however, still, people are not quite sure how to analyze their mutual fund investments. People usually start a SIP in mutual funds and forget about it as they have automated their SIP transactions and hence feel that they need not worry assuming they will successfully achieve wealth creation over the long term. It doesn’t always work that way. While mutual funds like equity funds do have the potential to help investors with long term wealth creation, they must ensure that their investments are performing and outperforming their benchmark from time to time.

Here are a few parameters based on which you might be able to analyze the performance of a mutual fund:

Direct plans v/s Regular plans

Now evaluating mutual funds is necessary but so is identifying whether you should go with a direct plan or a regular mutual fund plan. A regular mutual fund usually has a higher expense ratio as opposed to direct plans. That’s because regular plans are often sold by mutual fund agents, advisors, and third party aggregators who charge higher fees as they offer expertise to investors and as a result charge a higher expense ratio.

Portfolio of the mutual fund

Investors must carefully study the mutual fund’s portfolio so that they have a clear understanding of the securities in which it invests as well as the different sectors and industries to which the portfolio has exposure. Some funds have a niche target like oil, real estate, power, etc. while others invest across market capitalizations. It is essential to ensure that the mutual fund invests in credible securities.

Capital appreciation

The investment objective of mutual funds is to generate capital appreciation over the long term and in the process, help investors achieve their life’s financial goals. Returns are something that every investor has in mind when investing his or her money in any investment scheme. When it comes to mutual funds, every mutual fund scheme has an underlying benchmark that it aims to outperform. Investors must compare the returns of the mutual fund scheme to its benchmark as it will help them understand if the scheme has the potential to live up to its expectations.

Asset Under Management (AUM)

Asset Under Management is nothing but the total market value of a mutual fund. It is the money that all the investors have invested in it so far. For example, if a debt fund’s AUM is Rs 805 crores, then that means that the fund had so far pooled that much money from investors. A scheme with a high AUM is a good sign as it represents the steady cash flow and the economies of scale which the fund enjoys. Any mutual fund with a good capital inflow will not face redemption pressure, something which is important for the effective functioning of the mutual fund.

Total Expense Ratio (TER)

A percentage of the mutual fund’s total asset value is charged in the form of an expense ratio to investors. The expense ratio covers recurring costs like management costs, operational costs, etc. which the mutual fund must take care of to ensure its smooth functioning. A mutual fund with a low expense ratio means that your overall long term returns may be better than those who invest in a mutual fund with a  high expense ratio. SEBI has capped expense ratio at 2.25% and no AMC or fund house can charge investors with a higher expense ratio for any of the mutual fund schemes that they offer.