How to Track Mutual Funds – Learn to Analyse & Evaluate Mutual Funds
Selecting a good mutual fund scheme for investment is only half the job done. Once you select and start investing in a mutual fund, it is equally important to track the performance of the mutual fund scheme. This blog will focus on how to track mutual funds. It will discuss how investors can learn to analyse and evaluate mutual fund schemes.
Why should you track the performance of mutual funds?
An individual invests in mutual fund schemes to achieve their financial goals. Hence, it is important to track mutual fund performance to ensure you are moving closer to your financial goals. The best way to track mutual fund performance is to review their performance once every six months or one year to check whether they are giving the expected rate of return.
You may take corrective action if the mutual fund scheme is not performing as expected. It may involve pausing the existing investment, redeeming it, and reinvesting the redemption proceeds in another mutual fund scheme.
If you continue investing in underperforming mutual funds, there is a risk of you not meeting your financial goals. For example, suppose you are investing in an equity mutual fund scheme to build your child's higher education fund. Your expected rate of return is 12% CAGR. However, the fund has been consistently underperforming over the last few years, delivering only an 8% CAGR.
In such a scenario, you will not be able to accumulate the expected amount if the fund continues underperforming. The result will be that you will fall short of money when your child is ready to take admission to a college. At that time, you will have to arrange for the shortfall money from other sources or take a loan. Hence, it is important to evaluate the performance of the mutual fund scheme regularly, once every six months or a year.
How to track the mutual fund performance?
You can track mutual funds with PAN number on the AMC website. Once you log in, the dashboard will show you the details of all the schemes you have invested in. While evaluating the mutual fund scheme, you may consider the following parameters:
Is the fund outperforming the benchmark?
- Every mutual fund scheme has a benchmark such as the Nifty 50 Index or a broader market index such as the Nifty Midcap 150 Index, Nifty Smallcap 250 Index, or Nifty 500 Index. You should compare the performance of your mutual fund scheme with the benchmark index to see whether your scheme is outperforming the benchmark.
- If the scheme is outperforming the benchmark, it is a good indication. In that case, you may continue investing in the scheme and keep tracking it regularly in the future.
Is the fund outperforming peers in its category?
- Suppose you have invested in a Nifty 50 index fund of ABC Mutual Fund. Many other AMCs also offer Nifty 50 index funds. So, you should compare the performance of your Nifty 50 index fund with the performance of other AMCs. If your scheme performs better than many of its peers, it is a good indication. In that case, you may continue investing in the scheme and keep reviewing it regularly.
- If the scheme is underperforming its peer by a big margin, then you will need to take corrective action. You may redeem your investment and reinvest the proceeds in another scheme that is doing well in the same category.
Is the fund delivering better returns than your expected rate of return?
- When you invest in a mutual fund scheme, you will have an expected rate of return. For example, Ajay expects an 8% rate of return from debt mutual fund schemes, a 12% return from diversified mutual fund schemes, and a 15% return from sectoral or thematic mutual fund schemes. Ajay has invested in an IT Sectoral Fund with ABC Mutual Fund.
- While evaluating the scheme's performance, Ajay will check whether the scheme is delivering the 15% expected rate of return or higher. If yes, Ajay will continue investing in the scheme and keep reviewing it regularly in future. If the scheme consistently delivers a lower than 15% rate of return, then Ajay will have to stop the investments in that scheme. He will have to redeem the investment and invest the redemption proceeds in a different scheme.
Financial ratios and fund performance
While evaluating the performance of a mutual fund scheme, you should pay attention to certain financial ratios such as:
- While evaluating the performance of a mutual fund scheme, you should always keep an eye on the scheme expense ratio. The expense ratio directly eats into the investor’s returns. If the AMC is constantly revising the expense ratio upwards, it is a red flag.
- Alpha refers to the difference between your scheme returns and the benchmark returns. If your scheme returns are significantly higher than the benchmark returns, it is generating significant alpha and is a good indicator. If the scheme is underperforming the benchmark, it is not generating alpha. If there is consistent underperformance, you should consider redeeming the investment and reinvesting the proceeds in another scheme.
Tracking mutual fund performance is key to achieving financial goals
You will be able to achieve your financial goals only if your scheme delivers the expected rate of return. Hence, as an investor, it is important to track the performance of your mutual fund schemes regularly.