How to Track Mutual Fund Performance
Investing in your mutual fund is only half of the work performed. Once the investment has been made, it becomes equally essential to track it from time to time. Before selecting our mutual fund investments, most of us take advice and do due diligence. However, we often forget about them once they're done until a need arises.
Importance of Tracking Mutual Fund Performance
You may have seen the disclaimer that' past performance does not indicate a fund's future performance.' It means you can't expect guaranteed investment returns. Therefore, to evaluate a mutual fund, you need to look beyond the returns of the previous years. You should monitor your investments primarily so that you can make informed decisions that may result in higher returns.
You understand that the capital market continues to fluctuate as the general financial conditions change. Such a change disturbs the portfolio's asset allocation. For example, due to a market rally, an initial allocation of 50:50 in equity & debt may be changed to 60:40. It can improve the fund's risk profile beyond your needs.
Evaluation of the Fund also enables you to compare your investment's performance with other comparable funds. An assessment may also be triggered by a change in fund manager or basic characteristics of your fund. Therefore, it may be necessary to review and re-balance the portfolio risk profile intact.
6 Ways to Track Mutual Fund Performance
There are several ways you can evaluate the performance of your mutual fund investment. Few of them are listed below:
1. Fund Fact Sheet
A fund fact sheet is a document that details each of the AMC or mutual fund house managed schemes. It is released by the fund house monthly and is in an easy-to-read format. It contains the following information:
- Schemes performance – It provides performance in terms of compound annual growth rate (CAGR), standard deviation, Beta and Sharpe ratio.
- Division of your assets or deployment of your money in securities.
- Details of the size and investment of each scheme run by the mutual fund.
The fact sheet can be readily discovered on the website of the mutual fund and it is an optimal way to monitor your investments in the mutual fund.
2. Alpha Ratio
Alpha of the fund provides an overview of the abilities and policies of the fund manager and how they fared in the past. It should always be greater than the fund's expense ratio. Additionally, the alpha of your fund must be greater than the peers at the same beta stage.
3. Expense Ratio
This is fundamentally the charge to manage your mutual fund for the fund house. The expense ratio represents a fund's value-for-money aspect. It is made up of fund management fees and all other fund management associated expenses. It affects your ultimate in-hand returns.
Comparing the efficiency of the fund against the benchmark is always advisable. The benchmark functions as a performance standard for funds. If the benchmark is constantly outperformed by your fund, it is a sign that the fund is doing well. You can also compare the average return with your peer funds in the same category during a specific time frame.
5. Portfolio Holdings
Look for significant modifications in portfolio holdings and likely overlap. The fund must maintain excellent quality stocks with a reduced proportion of Price to Earnings-per-share (P/E) compared to Price to Book Value (P/B). Also, ensure that the fund invests according to its investment goal. For example, a poor indicator is a fund with a high portfolio turnover ratio compared to reduced yields.
6. Sharpe Ratio
This ratio demonstrates how much extra return you get for your additional risks. It is a thumb rule that more compensation must be given to higher risks. And you also receive a prize (additional returns) for the added volatility. Sharpe ratio tells you exactly how much this reward should be.
In short, a lot is said about performance by consistency. It is advised that you give at least 6 months to any mutual fund plan. After any transition, a month or a quarter may be too quick to track the performance of the mutual fund scheme. Do not get affected by your fund's short-term results and triggers and give it some time to demonstrate its worth and fulfill its investment goal.