How to Measure and Track a Mutual Fund’s Performance

Investing in mutual funds is a great way to grow your wealth, but how do you know if your chosen fund is performing well?

Asset management companies often share metrics like market share, fund flow, and the growth of their assets under management to attract investors. However, since mutual fund performance depends on various market factors, these metrics do very little to tell you the future of the fund or how well the company is performing.

So, when investing in mutual funds, you must measure a fund's performance regularly to pick the right funds and know if the fund has performed poorly, above average, or excellently.

How to measure a mutual fund's performance?

1. Measure the performance of mutual fund against the benchmark

A mutual fund's benchmark is an existing index or a group of securities similar to the various assets under the mutual fund. The benchmark is used as a point of comparison to judge the fund's performance.

When investing in a mutual fund, examine its returns over a period and compare it with the benchmark over the same period. If a fund consistently outperforms its benchmark, it's likely to be a good performer.

2. Check the expense ratio

The expense ratio represents the cost of managing the mutual fund. A high expense ratio can eat into your profits, so it's crucial to check this number. Generally, lower expense ratios are preferred for long-term investors.

At the same time, look at the fund size, performance, and investment strategy to know if the fund's expense ratio is worth it. If the fund delivers consistently high returns despite a high expense ratio, it may be a good investment.

3. Compare the performance of similar funds

Another good way to evaluate the performance of mutual fund is to compare its returns with similar funds in the same category or sector. For instance, if you invest in an index fund, you can look at the performance of another fund tracking the same index to make a comparison.

4. Determine the risk-adjusted returns

Often, it's not just about how much returns a fund delivers but how much risk it takes to deliver those returns. Use metrics like the Sharpe Ratio to determine risk-adjusted returns. A higher Sharpe Ratio indicates that the fund has generated better returns for the level of risk it has taken. This can help you identify funds that are efficient at managing risk.

5. Review portfolio strength

A portfolio analysis of a mutual fund gives insight into where your money is being invested. Evaluate the fund's allocation across various asset classes such as bonds, stocks, and alternative investments to ensure a well-diversified portfolio to manage risks and enhance potential returns.

Further, examine the quality of holdings and exposure to various industries and sectors. A balanced allocation in high-quality securities can help minimise concentration risk.

Wrapping up

Measuring and tracking a mutual fund’s performance isn't just about checking the NAV or returns. Understanding the portfolio composition, comparing it with peer funds, or measuring performance against benchmarks will help you make informed investment decisions.