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How To Analyze Mutual Funds Performance?

How to analyse mutual fund performance? Read for a detailed guide on how to analyse different mutual funds performance, parameters used, things to consider & more.

Everyone at some point in time has heard about investing in mutual funds being the magic trick to gain success, but to invest in mutual funds, knowing what it is going to do is important. Mutual fund analysis is important for any investor looking to start in mutual funds. 

Even for experts in the fields, without mutual fund analysis, the path to success is almost an impossible one to cross. Every mutual fund performs differently in the market and promises other returns. There is a risk, and there is also the promise of a reward with it. 

When starting, investors might look at the fund's riskiness or the returns that it promises. The ratings that a mutual fund receives also play an important factor in investors' decisions. While these factors are some of the first factors to look at, mutual fund analysis is not limited to just these. 

There are certain other important factors that we shall discuss that make mutual fund analysis the powerful tool it is. Nothing is known for certain without analysis, and in the case of investments, mutual fund analysis is as important as having the money to invest. Let us look at different factors that come under mutual fund analysis.

Different factors to analyze mutual fund performance


What is the first thing to do when we start to compare? A benchmark. Without a proper benchmark, any comparison is invalid. The same is the case with mutual fund analysis, and every comparison should be a right toe to toe comparison. 

A good example is comparing large-cap equity funds with a broad-based index like Nifty 50 or the Sensex. Comparing two funds, not in the same segment will always lead to an improper image of both the funds. The benchmark should also be a fund that meets all the criteria you have; you should use it to find better funds. If you wish to invest in funds performing at least in the top 25 percent of all funds, then a fund in the top 25 should be your benchmark. 

History & Expense Ratio

The history of anything from humans to funds can give a good indication of the performance. Mutual fund analysis relies on history because it uses past performances to guess future performance. It is a reliable indicator and should be used compared to the benchmark that is set. 

For example, if the benchmark has lost 15 percent during a slump, whereas the fund you want to invest in has lost 10 percent, then the fund has performed better. History should be used to judge the fund's performance in various phases of the market and different business cycles. Mutual fund analysis also requires that the fund have a history of at least five years or more to understand the fund's performance better.

Every fund that manages your investment will charge a fee on your investment; this is called the fund's Expense Ratio. According to the SEBI guidelines, it is charged annually and cannot be more than 2.5 percent of the average asset under management (AUM) of the fund. While looking for funds to invest in, check the expense ratio of similar funds to understand better which is more profitable. This is because the higher the expense ratio, the lower your gains will be.

Risk-Adjusted Returns

The first look during any mutual fund analysis is usually on the funds' returns. But looking at just the annual returns might be misleading since some funds take a higher risk than others. Hence, during mutual fund analysis, investors should look at risk-adjusted returns to better understand which fund gives better returns than the risk taken by it. 

The Sharpe Ratio can be used for comparison to funds, which answers if the fund is giving higher returns for every additional unit of risk taken by it. If the fund you want to invest in has a higher Sharpe ratio than the benchmark, then the fund has given higher returns even with the additional risk taken. Keep in mind, though, that the Sharpe ratio of a fund with considerably higher risk should also be higher than a similar fund with a lower risk and lower Sharpe ratio.

 If two funds have a risk of 14% and 20% but the Sharpe ratio is 0.46 and 0.50, then the first fund is a better choice since a 6% higher risk is not justified by a 0.04 difference of Sharpe ratio.

Average Maturity & Duration

When investing in debt bonds, a careful look should be given to the average maturity and duration of the debt bond. Average maturity refers to the average period after which the debt bonds in the fund will mature; that is, the return will be cashed out. A fund might have a series of bonds, and the average maturity gives a period after which you can expect returns. 

Average maturity time is a gamble between risk and reward. A longer maturity time puts you at a greater risk for market interest rate fluctuations, but it also allows you to gain higher returns if the interest rates begin to fall.

Duration gives the time a bond will take, or investment will take for you to reach the break-even point. When a fund reaches the break-even point, you can say that your investment has been recovered. If your fund can reach the break-even point quickly, that is, its duration is shorter, you can quickly make higher gains. The duration of any fund should match your investment horizon, that is, the period you want to invest your money for.

Alpha & Beta

Alpha and Beta are values that you can use to decide if your fund is better than the benchmark or worse off. Alpha value gives the extra returns that a fund gives compared to the returns of a benchmark fund. If a fund has an alpha value above one, then it gives more return than the benchmark, and if it has an alpha value below one, it gives lower returns than the benchmark fund.

The beta value of a fund is a measure of the riskiness of a fund compared to the benchmark returns. It also measures whether the fund is losing or gaining more than the benchmark fund. A beta value indicates that the fund is losing or gaining equal to the benchmark. A beta value less than one means that the fund is less affected by the market than the benchmark and higher than one indicates it is more easily affected by market conditions than the benchmark.

Portfolio Turnover Ratio

The PTR or Portfolio Turnover ratio gives an idea of how the fund is managed. A fund will always have a fund manager who decides the fund's portfolio. The fund manager is in charge of selling and buying securities in the portfolio. The buying or selling of a share or equity will affect the fund's expense ratio. There will be brokerage charges and other transaction charges if there is more selling. 

The same is the case with frequent buying of securities in the portfolio. Eventually, the action of the fund manager affects the expense ratio and, therefore, the amount of return that you can take home. Hence look for a fund with a lower PTR since your expense ratio will be less volatile. But if a fund has a higher PTR that is justified by a high return, you may choose to go with it.

Glide to the Rescue

For someone starting in mutual funds, all the above information is a lot to digest. Applying this information for mutual fund analysis is an even harder task. But at Glide, we are there to ensure that your starting steps in investing are not difficult. We provide a selection of funds that we have taken the time to analyze. We analyze every minute detail of the funds for you so that you do not have to break a sweat trying to analyze which is better than the other.

Mutual fund analysis is an important step towards investing; avoiding it equals stepping into the storm blindfolded. 


Can history solely be the indicator for a fund's performance?

No, it cannot be. Market conditions are constantly changing, and while history is a good indicator of future performance, it cannot be the sole condition to rely on.

Should a fund have higher alpha and beta scores?

The optimum fund should have an alpha score higher than one and a beta score close to 1. Though in some cases, a beta score below one may be preferred.

Can mutual funds analysis be exhaustive?

No analysis is exhaustive or 100% accurate. It is a matter of intelligent guessing that can help make better decisions.

To read more on similar topics, click here:

Absolute Return In Mutual Funds

Guide To Growth Investing

How To Track Mutual Funds

Step-Up SIP Calculator

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