When it comes to investing your money, mutual funds is the most attractive option. However, since you put in your money to earn more, there are higher chances that you would be welcoming higher risk for yourself. To avoid much harm caused by fluctuations in the market, it is suggested that you analyse all the available investment options before taking any financial decisions.
Here is a list of the major factors that you must consider while you are in the process of mutual fund portfolio analysis-
1. Returns
- Before investing in a fund, it is important that you compare the fund’s current returns with its benchmark returns. However, you must compare the different fund with the same benchmark.
- For example, if you are comparing large-cap funds, then you must compare them with a broad-based index such as Nifty 500. If the fund’s returns, for instance, were 9% while that of its benchmark were11%, then clearly, the fund is not performing well.
2. History
- The best way to judge a fund is to check its performance during bullish markets. If the fund remains stable during bullish markets, then it will help you reap higher returns during bearish markets.
- To evaluate the fund’s performance, you must check its performance during the long-term, say, last 5-10 years. Its performance during different time intervals and business cycles will give you a lot of inputs about its overall performance.
3. Expense Ratio
- The annual fee that the investors have to pay to the fund house and/or fund manager for managing their funds is called an Expense Ratio. Before deciding on which fund you will invest in, it is necessary that you check its expense ratio.
- As per SEBI’s guidelines, no fund house can charge an expense ratio of more than 2.5% of investor’s assets.
- It is important to note that the same mutual fund is available as Direct fund and Regular Fund. Since, direct funds do not involve any broker in between, they have a lower expense ratio, Regular funds, on the other hand involve brokers and intermediaries whose commission gets added to the expense ratio.
4. Maturity and Duration
- Maturity and duration are considered important aspects specifically in the case of debt funds. Effective duration and average maturity apply only if the investor has a portfolio consisting of several bonds. While maturity refers to the expiration of a bond, duration refers to a measure of the bond’s price sensitivity to changes in interest rates.
- Maturity of a mutual fund basically refers to the time period after which the securities held by a debt fund will mature. The longer the maturity, the more chances are that the fund’s returns will be affected by the interest rate movements in the market. This further leads to higher chances of decrease in the Net Asset Value or NAV of the fund, certainly as a result of the rise in interest rates.
- Duration refers to the time that each debt fund takes to reach a break-even point i.e. a point where there is no profit and no loss to the investor. In such cases, the shorter the time period, the faster it will return to its original investment.
5. Alpha and Beta
- Apha refers to the number of extra returns, apart from the benchmark returns that the fund generates.
- Beta indicates whether the fund gains or loses compared to its benchmark, while also implying the riskiness of the fund. The fund’s performance based on its beta value can be judged as follows-
- If the beta value of the fund is more than one, it shows that the fund gains/loses more than the benchmark.
- If the beta value of the fund is less than one, it shows that the fund gains/loses less than the benchmark.
- A beta value of one, however indicates that the mutual fund’s returns are same as the benchmark.
6. Portfolio Turnover Ratio
- Portfolio Turnover Ratio or PTR indicates how often does the fund manager buy or sell the securities in the portfolio. Frequent trading in a portfolio leads to increased expenses and is reflected in the expense ratio. (Kindly note that higher expense ratio ultimately reduces the amount of interest that you gain from the fund).
- While looking for a fund, you must ensure that the fund you choose has a lower PTR. Higher PTR can only be justified in case the fund is offering equally higher returns.
Investing is not as easy as it may seem, unless you actively follow the market trends. However, you can always take assistance from our experts regarding mutual fund performance analysis for any investments that you may be willing to make.