Be Wise - Evaluate a fund’s performance before investing

Nutan Gupta

17 Dec 2016

While a lot of people invest in mutual funds, they are not aware of the performance of their funds. The main reason for this negligence is the lack of proper knowledge on how to evaluate a fund’s performance. Here are few simple guidelines/terms which will help you in determining the performance of the funds you have invested in or wish to invest in the future.

Risk Adjusted Returns

Risk adjusted return is a measure to identify how much return an investment will generate at the given level of risk associated with it. If you compare two investments which have given the same return over a given period of time, the investment which has the lowest risk will have a better risk-adjusted return.

Rolling Returns

Usually a fund’s short-term performance is influenced by the performance of some sectors. Hence, it is very important to go through the rolling returns of a fund, which are returns generated by the fund over a period of time.

Benchmark

Benchmark is comparing your fund’s performance with other similar entities - widely known as corresponding index. This helps you know how the overall asset class is performing against its benchmark index.

Volatility

Check the fund’s performance during the period when the market was volatile. This will help you know if the fund is able to sustain its position during a volatile market.

Quality of stocks in the portfolio

Before investing in a particular fund, check the quality of stocks in the fund’s portfolio. Good quality stocks will help you generate returns, thereby improving the overall performance of the fund and vice-versa.

Relative Performance with Peers

It is very important to check how the mutual fund is performing as compared to other funds in the same category. It is advisable to invest in a fund which gives better returns when compared to its peers.

Track record of the Fund Manager

Fund Manager is the person who makes investment decisions and selects the stocks in your portfolio. Hence, it is very important for a fund manager to have a good track record when it comes to stock selection. Always check the track record of the fund manager in terms of return generated by his funds before investing in a mutual fund.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Be Wise - Evaluate a fund’s performance before investing

Nutan Gupta

17 Dec 2016

While a lot of people invest in mutual funds, they are not aware of the performance of their funds. The main reason for this negligence is the lack of proper knowledge on how to evaluate a fund’s performance. Here are few simple guidelines/terms which will help you in determining the performance of the funds you have invested in or wish to invest in the future.

Risk Adjusted Returns

Risk adjusted return is a measure to identify how much return an investment will generate at the given level of risk associated with it. If you compare two investments which have given the same return over a given period of time, the investment which has the lowest risk will have a better risk-adjusted return.

Rolling Returns

Usually a fund’s short-term performance is influenced by the performance of some sectors. Hence, it is very important to go through the rolling returns of a fund, which are returns generated by the fund over a period of time.

Benchmark

Benchmark is comparing your fund’s performance with other similar entities - widely known as corresponding index. This helps you know how the overall asset class is performing against its benchmark index.

Volatility

Check the fund’s performance during the period when the market was volatile. This will help you know if the fund is able to sustain its position during a volatile market.

Quality of stocks in the portfolio

Before investing in a particular fund, check the quality of stocks in the fund’s portfolio. Good quality stocks will help you generate returns, thereby improving the overall performance of the fund and vice-versa.

Relative Performance with Peers

It is very important to check how the mutual fund is performing as compared to other funds in the same category. It is advisable to invest in a fund which gives better returns when compared to its peers.

Track record of the Fund Manager

Fund Manager is the person who makes investment decisions and selects the stocks in your portfolio. Hence, it is very important for a fund manager to have a good track record when it comes to stock selection. Always check the track record of the fund manager in terms of return generated by his funds before investing in a mutual fund.

Have Referral Code?