Mutual Funds: The Right Way to Check the Performance of Your Mutual Funds

Do you want to keep track of your? Mutual fund Are you interested in performance but don’t know where to start? Don’t worry! ET Markets has your back! In a special episode of ET Smart Investor, we sit down with Arun KumarVice President and Head of Research, FundsIndia, for expert insights on best practices for monitoring fund performance.

Extracts:

What is the starting point for performance monitoring?
Arun Kumar: A common mistake is to start by focusing on individual funds. Instead, start by evaluating the entire portfolio. Set a review frequency of 3-6 months, ideally 6 months. First, look at the overall performance of the portfolio over 1, 3, 5, and 7 years, giving more weight to longer periods. One-year performance is often noise, but it can indicate short-term outliers. Use a benchmark that aligns with your portfolio (e.g. 70% equity, 30% debt), not just a pure benchmark. equity Index like the Nifty 50. After reviewing the portfolio, dig deeper into asset classes like equity, debt and gold and compare them with relevant benchmarks. Finally, analyse individual funds against broad benchmarks (e.g. the Nifty 50) and specific benchmarks at the fund level.

How often should short- and medium-term investors conduct reviews?
Arun Kumar: Six months is still a good timeframe, even for short- and medium-term investors. Fund changes don’t usually happen in short periods, but you should keep an eye out for any major changes, such as management or style changes. A quick review every three months is fine, but a detailed review every six months should be sufficient.

How can you easily determine if your fund is underperforming the benchmark, including sector mutual funds?
Arun Kumar: Make comparisons to understand performance.

MF: Use tools to compare the fund’s performance with a broad index like the Nifty 50 or Nifty 500 over 3, 5 and 7 years. This will give you a basic idea of ​​the performance.

Reference comparison: Identify the relevant benchmark for each fund. For mid-cap funds, use Nifty Midcap 150; For quality-focused funds, use a quality index. Compare the fund’s performance to broader, more specific benchmarks.

Contextual analysis: If the fund is underperforming the overall index but not the specific benchmark, the problem could be with the style or sector, not the fund itself. For example, if a mid-cap fund is underperforming the mid-cap index, but the index is also underperforming, this could be a sector-wide problem.

Fund Manager Perspectives: Check the fund’s website or recent interviews with the fund manager for explanations of performance. If the fund is consistently underperforming and lacks transparent communication, this is a cause for concern.

Additional factors: Keep an eye out for changes such as new fund managers or significant changes to the portfolio. High turnover or instability at the fund manager can also impact performance.

Watch the full interview here

Are there specific ratios or data points to consider when evaluating mutual fund performance?
Arun Kumar: While there are various ratios, such as the Sharpe ratio or alpha, they often don’t capture the full context of performance cycles and style differences. For example, a fund may appear to be underperforming based on the ratios, but that could change if the market or style changes. Rather than relying solely on the ratios, consider the fund’s performance relative to its style benchmarks and overall market conditions. Evaluating the fund’s adherence to its strategy and the broader investment cycle can provide a more nuanced view.

Is the assessment of sector and thematic funds different from that of diversified funds?
Arun Kumar: Yes, the approach varies:

Diversified funds: Diversified funds benefit from time. Investing in different styles (e.g., quality, growth, value) helps balance long-term performance. Even if one style temporarily underperforms, others are likely to make up for it. Focus on whether the fund stays true to its investment style. Over a 7- to 10-year period, a diversified portfolio with varied styles generally performs well, despite temporary underperformance in some areas.

Sectoral and Thematic Funds: These funds require precise timing. They may underperform or outperform depending on the economic cycle and sector valuations. For example, infrastructure funds may lag during recessions but excel during recoveries. Assess the sector’s position in terms of its valuation and economic cycle. Enter when valuations are low and the cycle is turning positive; exit when valuations are high or the cycle is peaking. Compare the fund’s performance to its sector index. Make sure the fund aligns with the sector’s fundamentals.

What advice would you give to investors who are monitoring mutual fund performance on their own?
Arun Kumar: Of course, there are some points to keep in mind when tracking your portfolio’s performance.

Avoid focusing solely on performance: Don’t judge a fund solely on its performance. All funds, especially diversified ones, will have periods of underperformance.

Evaluate the investment style: Determine whether the fund adheres to its stated style or approach. Compare it to relevant benchmarks and other funds in the same style.

Good vs. Bad Performance: Understand whether poor performance is due to temporary style issues or is a sign of a problem with the fund. Evaluate whether the style itself is out of date or whether the fund is lagging even within its category.

Sectoral and thematic funds: For sector funds, extreme performance (both high and low) can be a signal to adjust investments. Outperformance can indicate overvaluation, while underperformance can represent a buying opportunity.

Disclaimer: Please note that these are not recommendations. Investments in mutual funds are subject to market risks; please read all documents related to the scheme carefully.