How to Measure and Track A Mutual Funds Performance

A mutual fund is considered one of the best investment options for wealth creation. While investing in a mutual fund, it is important to know various factors impacting the mutual fund’s performance. A good mutual fund offers you a good return and has lower risk. Whether you are a seasoned investor or new, you must always measure and track the performance of mutual funds. This helps you in reducing your financial burden. Let us read about how to track a mutual fund performance in detail. 

Reasons to analyze mutual fund performance

Before understanding how to measure mutual fund performance, you must know why you should analyze mutual fund performance. Here are a few of the reasons:

• Better decision-making
  While analyzing a mutual fund's performance, you evaluate different parameters to check the track record of the mutual fund over the years. This also helps you understand if there is any inconsistency in mutual fund performance.
• Risk Management
  Risk and reward are two of the major aspects of any investment. Analyzing the mutual fund performance helps you understand the potential risks involved. Using this information, you can adjust your portfolio and adjust your fund according to your risk tolerance.
• Financial Goal Alignment
  Your investment portfolio must align with the investment strategy. By constantly measuring the performance of mutual funds, you can adjust your portfolio to meet your investment strategy and long-term investment goal.

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Parameters to analyze mutual fund performance

Below are the parameters to analyze mutual fund performance to help you achieve your financial goals:

• Benchmark Comparison
  Benchmark Comparison helps you understand how the fund has performed as compared to the set benchmark. If the fund has performed above the set benchmark, it is considered for investment as it has delivered consistently higher returns than other funds.
• Expense Ratio
  The expense ratio is the percentage of the total assets that a mutual fund charges annually for managing funds. A higher expense ratio reduces your returns while a lower expense ratio is considered best for your portfolio. However, you must consider over performance of the fund and other factors before choosing a mutual fund.
• Peer Comparison
  Comparing mutual funds in the same category will help you understand how it has performed as compared to other funds. This will help you eliminate all the unrelated funds and factors that can mislead your investment decision.
• Economic Cycle
  It is important to be aware of the changes in the economic trends as these impact your mutual fund performance. Market movements are influenced by economic and market cycles which affect your returns on funds.
• Portfolio Turnover Ratio (PTR)
  Measuring the portfolio turnover ratio helps you assess the frequency at which the fund’s assets are sold and bought. A higher portfolio turnover ratio may lead to higher transaction costs. To ensure the cost, you must compare the fund’s performance with the PTR. You should be aware of the higher turnover cost as it may not reflect better performance. As long as there is a higher return, frequent trading is considered as beneficial.
• Risk-Adjusted Return
  There is a different type of risk involved with every mutual fund. You must consider risk-adjusted returns, which take into account the risk involved to generate investment returns. You must look at risk-adjusted returns rather than absolute returns. Treynor ratio and Sharpe ratio help you understand risk. Treynor ratio rewards funds that generate high returns as compared to market risk taken. Meanwhile, the Sharpe ratio rewards funds that generate high returns compared to their overall volatility.
• Fund Manager Tenure
  Tenure of a fund manager helps you in understanding the number of years of experience in managing the funds. A fund manager with experience and a track record of consistent performance gives you confidence in investing in fund management. It also means that the fund manager can drive the fund’s performance.

Conclusion
Tracking mutual fund performance helps you understand the performance of the mutual fund. This helps in making an overall informed investment decision. Factors such as fund manager tenure, risk-adjusted return, portfolio turnover ratio, economic cycle, peer comparison, expense ratio, and benchmark comparison can give you valuable insights before investing in a mutual fund. Moreover, it is important to understand your risk tolerance and investment goal before investing.