How does one analyze mutual funds?

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The popularity of mutual funds continues to rise exponentially. This is the reason why the total assets managed by all asset management companies in the country or AUM has touched Rs 47 lakh crore. People repose a lot of faith in mutual funds. This is also why many people invest and then, forget about it. But this is not the right approach. Irrespective of the fund house or scheme, it is important to review them periodically

Now, you must be wondering, how does one review or analyze their mutual funds?

First off all, understand if the fund’s performance is in accordance with your goals. You must have invested in a mutual fund with a specific objective. It is important to see whether or not the fund will be able to meet this aim with the returns it is generating. Along with this, you also need to focus on some other fundamental aspects.

The first is performance evaluation. Here, see the returns generated by the fund over the past one, three and five years. If a fund is underperforming in terms of returns, try and assess the reasons for the same. You should not exit any mutual fund solely because it has been loss-making in the short term. Even if the funds you have invested in is not generating returns commensurate to your expectations, do not make a hasty, immediate exit. Monitor the fund for at least 1-1.5 years. Analyze how other similar schemes are performing in comparison to yours.

The second aspect is linked to identification of benchmark. Every fund has a benchmark, which can be used to analyze its performance. A good mutual fund is one which consistently beats the benchmark, or delivers higher returns than the benchmark

For mutual funds, the benchmarks are a type of index, under which shares and other securities are grouped. The value of the index is determined on the basis of a specific formula. For instance, the BSE Sensex is a benchmark which constitutes 30 shares. If a scheme, which has Sensex as its benchmark index, consistently delivers better returns than it, it will be considered a good scheme

Thirdly, it is important to keep an eye on your fund manager. If there are frequent changes in the senior management of a mutual fund, it indicates at the incompetence of the fund management. Pay close attention to any news related to changes in fund managers. This is because when a new fund manager comes in, there is a significant change in the fund’s investment style as well.

See that the fund manager’s tenure lasts for a minimum of 3 years. Also, check what type of changes is the fund manager making to the portfolio. All this information is available on the fund’s website.

Certified Financial Planner Jitendra Solanki says that a mutual fund should be reviewed in the context of an individual’s financial goals. It is important to see if the fund’s returns are in accordance with your goals.

Also check how much protection does the fund have against market downfall. How have similar funds performed in comparison to your scheme? What is the investing strategy of the investment team, and what changes are they making to the portfolio. Make a decision only after considering all these factors.

In this age of digital information, it is very easy to track the performance of various mutual funds via multiple websites and apps. TV channels and newspapers also regularly analyze mutual funds.

You can also use the fund’s factsheet to track your investments. A factsheet is a basic, one-page document that details the scheme’s performance and its portfolio’s information. This is published every month by mutual funds.

Additionally, you can also obtain information  about a fund’s performance through the AMFI website.