Mutual Fund Analysis – Metrics & Factors to Analyze Mutual Funds Performance

Know everything about Mutual Fund Analysis here. Find various metrics & factors that will help to analyze mutual fund performance. Mutual funds are risky yet profitable investments.

They have become quite popular in recent decades. This is because people are realizing that smart investments and proper management of mutual funds can earn great profits.

Mutual funds are a great way to make the unused capital work for a person. Mutual fund analysis is important to make the right decisions about investing.

While investing in funds, a fund’s performance must be analyzed using several factors.


Mutual Fund Analysis – Metrics or Factors

Here are the list of various Metrics & Factors anyone must Analyze before investing in a Mutual Fund. Check out the list here –

  • Fund Performance vs Benchmark Performance
  • Risk Level of a Fund
  • Fund’s History
  • Portfolio Turnover Ratio
  • Fund Manager
  • Avoid Attractive Schemes
  • Fund Performance in 5-10 years
  • Weights to measure Fund Performance
  • Expense Ratio

These are the various metrics or things you should definitely analyze before investing in any mutual funds.

Now, lets discuss about each of these Metrics & Factors in details and understand how to do Mutual Funds Analysis.


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    Fund Performance vs Benchmark Performance

    One of the most important metric to check for Mutual Fund Analysis is the comparison of Fund & Benchmark Performance.

    When comparing the returns from the mutual fund performance, it is always better to compare the fund performance with the benchmark performance.

    The benchmark performance is the aim of the fund. It is the amount that we have to earn.

    If the fund performance outdoes the benchmark performance then the additional capital we call it the funds Alpha.

    Earning funds Alpha means a positive sign. Funds that always outperform their benchmark performance is also good at fund management.

    At the same time, if a fund is providing mutual fund performance less than the benchmark, it is a loss for the investor because he loses on the money that could have been earned.

    For example, if the fund has set the benchmark at 20% but has a fund performance of 15% then the investor loses out on the 5% that could have been earned.

    Similarly with a benchmark of 20%, if the fund performance is of 25% then the investor earns an additional 5% besides the benchmark performance.

    A fund that has consistently outdone its benchmark shows a positive sign.


    Risk Level – Helps in Mutual Fund Analysis

    When we consider Mutual Funds, the risk is obvious. It is important to do risk profiling before selecting a mutual fund.

    Risk levels are of five types Namely low risk, moderately low risk, moderate risk, moderate-high risk, and high risk. Before selecting a scheme it is important to check for the risk.

    An investor must select a scheme with a risk level that fits the investor’s appetite. This is exactly why risk profiling is important.

    Moreover, as an investor, it is important to select high-risk mutual funds only if they offer high returns.


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    Fund’s History – Helpful in Mutual Fund Analysis

    Before judging a fund for its performance one must look at the fund’s history. Moreover one must make sure that the analysis of the fund happens by its history of at least 5 years or a decade.

    This helps in viewing the fund’s performance through different market cycles.

    Similarly, if the market has been down for a year however the fund has remained stable then it indicates that the fund is performing well.


    Portfolio Turnover Ratio – Important Metric in Mutual Fund Analysis

    The portfolio turnover ratio is also an important factor to consider while analyzing mutual funds. This portfolio turnover ratio is how frequently the fund manager sells or buys securities from the fund.

    The higher the portfolio turnover ratio is; lesser the returns can be for the investor. This is because the more the buying or selling means more the charges of brokerage will be.

    Therefore it is wise to consider fund managers that have a moderate portfolio turnover ratio.


    Fund Manager – Major Factor in Mutual Fund Analysis

    A fund manager is a crucial factor when it comes to Mutual Funds Perofrmnace Analysis.

    While analyzing Mutual Funds it is important to take the fund manager under consideration. Analyzing the fund managers’ performance, history, skills, and tenure is important.

    Similarly judging a fund manager based on the performance of the fund house in the past 5 years whereas the manager has had the tenure of only one year is unfair.

    One must analyze the tenure of the fund manager along with the fund’s performance.

    For example, one must analyze the term of three years of fund performance with the three years of fund managers’ tenure.


    Avoid Attractive Schemes – Important Factor in Mutual Fund Performance Analysis

    If fund houses are offering mutual fund schemes that have extremely high returns in a very short period, for example, one year it is best to stay away from the same.

    In mutual fund analysis, we can see that these short-term high-return schemes attract a lot of investors. This means that a lot of funds will naturally pool into the fund house.

    A greater number of investors and funds make it more difficult to manage. The increased responsibility leads to carelessness.

    A good fund manager will always take on the responsibility of a limited number of investors and funds so that the funds are managed efficiently.


    Fund Performance in 5 – 10 Year

    While analyzing the mutual fund performance of a particular fund house or a fund manager, it is important to consider a period of 5 to 10 years.

    This is because even the best of managers have one year of average or below-average performance in three years. This is exactly why judging from the short term is wrong.

    The market is extremely volatile and one bad year does not define a fund house or fund manager.

    One must also analyze the fact of how the fund house of fund manager has performed in bad economic times.

    If the fund has performed relatively well in even bad market situations, then it is indeed a good fund to go for.

    Similarly, if the performance of a fund is bad even though the market has been good then that means it is best to stay away from the same.

    Again this judgment must always be done on a long-term basis.


    Weights to measure Mutual Fund Performance Analysis

    Mutual fund performance usually has 4 time periods. These are 1 year, 3 years, 5 years, and 10-year returns.

    When judging a fund’s performance one must give more emphasis to the terms that one is interested in, and less to the other terms.

    This means that a long term investor will give more emphasis to longer-term performances and less to short-term performances.

    This means that 10 years performance returns should be given 40% emphasis whereas 5 years should be given 30%, 3 years should be given 20, and 1 year should be given 10% emphasis while analyzing fund performance.

    This ensures that the fund is analyzed fairly. One can multiply the percentage weights by the corresponding year and hence compare one fund’s performance with the other.

    This helps in getting an idea about the possible performance of the fund in the future.


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    Expense Ratio – Important Metric to Analyze Mutual Fund Performance

    Before selecting a fund it is important to consider the expense ratio that the fund charges. The expense ratio is the fee that is charged for the management of the funds.

    This is generally in 0.5 to 3 percent on total returns. More the expense ratio less the returns as it is deducted from the returns.

    Even though the ratio might seem small it is large in capital terms. It is best to keep the expense ratio as low as possible.


    Mutual Fund Analysis – Conclusion

    Regular mutual fund analysis is important for beginners and experts alike. There are several factors that one should consider while doing mutual fund analysis.

    The above-mentioned points are a few that will help in the successful analysis of mutual funds as well as the performance of the funds.

    This will help in taking the right decisions regarding the same and therefore help in earning profit or avoiding losses.

    Also one can take help from a financial advisor for correct mutual fund analysis. This is good for beginners however if possible it should be avoided because this will only lead to the added cost.


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