How to know track record in mutual funds?

Manish, on the advice of his friend, invested in a mutual fund which was showing bumper returns for the last one year. But when there was an upheaval in the market, all the returns vanished. This problem is not only of Manish. After this incident, Manish got a lesson that mutual is a good option for investment, but one should invest in it only after checking the track record of the fund. So, how does one know thw track record of a fund?

Investment advisor Jitendra Solanki says that if you do not have the track record of a fund, then you do not know its future. There are some key parameters to know the performance of a fund. If a scheme meets this criterion, you can expect good returns by investing in it.

What are the standards
First of all find out about the Sharpe Ratio i.e risk adjusted return of the scheme. From this, it is known that the amount of risk this scheme is taking, how much return it has given on average. If there are two schemes of the same category, which one has better Sharpe Ratio.

For example, if Sharpe Ratio of company “A” is 0.4 and that of “B” is 0.8, it means that company “B” is giving better returns than company “A”. It means both the companies are taking equal risk but by adjusting it company “B” is giving more returns to the investors.

Turnover ratio
After this, the portfolio turnover ratio should be seen. Through this, it is known that how many times the fund manager churned the portfolio, ie sold and bought, during the year in the scheme. It does not mean that the scheme whose portfolio is churned more will give less returns and the one which churned less will perform better. If a fund manager is taking frequent and small calls, it can lead to poor portfolio returns.

Rolling return
Rolling return is the third important parameter to judge the track record of the fund. These days all analysts use this. If you track the record of a fund for the last five years, then through rolling returns it can be found out how the scheme has given month wise returns. If this return is stable then the scheme is better for investment. If there is a high return in some months and very less in some, then such schemes are not considered good for investment.
Money9 suggests
If we are checking the past record of a fund, then do not decide the future on the basis of that. It is not necessary that if a fund is giving bumper returns now, it will continue in future also. If you do not have enough knowledge about this, then take the advice of an investment advisor.