Assessing MF’s performance

Many people take hesitant steps towards the stock market via a mutual fund scheme. But once they start getting the statements from the fund house, they don’t really know what to make of it.

For example, recently a new investor wondered: What does a net asset value of Rs 48 mean? How do I know whether I made money or not? Eventually, upon taking a closer look, she found that the statement did, in fact, mention her purchase cost and the current value of her holdings. Comparing those figures gave her a rough idea how much she had earned from her investment.

It is true that a few first timers have a problem figuring out their returns. But these days, it is not much trouble as so many newspapers, magazines and internet sites constantly provide the information.

There’s no need to work hard to find out how ones mutual fund scheme has fared. One can assess its absolute performance, and also its performance vis-à-vis its peers. Just follow the commonsense steps described below.

The easiest way to figure out the performance of ones MF scheme is to visit the website of the fund house. Here, one can usually find its performance in percentage terms for various periods – typically one month, three months, six months, one year, and three years. The investor can also refer to the quarterly statement sent by the fund house. It may also contain these details. If looking for a more nuanced analysis, he/she can visit the websites of independent mutual fund tracking firms. These days, even newspapers and magazines come up with mutual fund surveys, which give detailed information. One can also find risk adjusted returns here, which many believe is a more realistic way of looking at the performance of a mutual fund scheme. This would give an idea how much risk one is taking for the returns the fund has posted.

The next step is to find out how an investor’s MF scheme has performed against its benchmark. Every mutual fund scheme has a benchmark that enables one to, make a fair comparison. For example, if one has invested in a pharma scheme, he should compare its performance with the pharma index. Comparing it with broad benchmark like sensex will not give a meaningful picture. If the MF scheme is constantly lagging behind its benchmark, it suggests that the MF fund manager is not too good at his or her job. This is especially true of index funds.

The investor must also find out as to how his fund fared in comparison with its peers. But, when comparing with peers, make sure to look at returns calculated by the same method. For example, one source may give absolute returns, while another gives risk-adjusted returns.

It is essential that an investor keep track of the scheme he or she has invested in, by comparing it constantly with its benchmark and peers. This is the only way he/she can make sure that her investment is keeping pace with the general growth in the market. If the investor finds his scheme is lagging, he should examine it further and take remedial measures. Those measures would include redeeming units, and putting money in better performing schemes.

If an MF scheme is constantly lagging behind its peers and the benchmark index, take a close look at fund manager’s investing strategy – the portfolio will give the investor an indication. But don’t make any rash decisions. Perhaps the fund manager is taking a cautious approach, and that is the reason for the under performance. If that is the case, then the investor would be better off when the market falls. Give your scheme some time before making any changes.