Parameters to Help You Keep Track of Your Mutual Fund Investments

It is important to know the key parameters or metrics that will help you analyze your mutual fund investments as it aids in making informed decisions based on performance evaluation. It can help you achieve your financial goals and build a robust investment portfolio. 

A Quick Recap – A mutual fund is a pooled investment vehicle that collects money from various investors and invests in a diversified portfolio of assets, such as stocks, bonds, and money market instruments. 

Here are the key parameters that you need to keep on your RADAR while analyzing your mutual fund investments – 

1. Returns & Risk – There are two key performance indicators associated with mutual fund investments – returns, and risk. Returns are the most critical aspect of mutual fund performance analysis. It is prudent for young investors to assess the fund’s historical returns over different time frames. You can go back a year, or three, or five – depending on how extensive you want your research to be! However, it’s essential to consider both the absolute returns and the fund’s performance relative to its benchmark and category average (which we’ll get to in point 2). It is also smart to always account for risk when investing in mutual funds. Investing always involves some level of risk. Therefore, it is crucial to evaluate risk measures to gauge the fund’s volatility and sensitivity to market movements. 

2. Benchmarks & Categories – Every mutual fund investment has a benchmark index that represents the fund’s investment objective. Think of a benchmark as the student in class who has consistently outperformed even their toughest competition! This student’s grade was always under ‘class topper’. You should compare the fund’s performance against its benchmark to gauge its ability to outperform the market. Now, think of how there was always a ‘class average’ mentioned in your report cards. This essentially equates to a category average in mutual fund investing. Comparing the fund’s performance with the average performance of similar funds in its category offers insights into how well the fund is performing relative to its peers.

3. Expense Ratio – The expense ratio is the annual fee charged by the mutual fund investment company to manage the fund. The higher the costs associated with investing, the higher is the expense ratio. As a young investor, you should consider mutual funds with lower expense ratios as they can eat into your overall returns. A lower expense ratio indicates efficient fund management and is more beneficial for wealth creation in the long run!

4. Portfolio Composition – Understanding your mutual fund investment portfolio composition is essential to assess its risk and potential returns. It is always recommended that young investors should evaluate the asset allocation, sector distribution, and concentration of top holdings. A diversified portfolio helps reduce risk and provides a cushion against market fluctuations.

5. Fund Strategy – Each mutual fund investment follows a specific investment strategy. You can choose from options such as growth, value, or dividend-oriented mutual funds. Young investors especially must align their investment strategy with their financial goals and risk tolerance. It is important to draw necessary conclusions about mutual funds based on the key strategy that is being relied on. For instance, on the one hand, growth funds may be more suitable for long-term capital appreciation, while dividend funds may provide regular income.

6. SIP vs. Lump Sum – Two completely different approaches to mutual fund investments, the SIP vs. lump sum debate is an old one. Young investors often invest through Systematic Investment Plans (SIP) to benefit from rupee cost averaging – this is a choice we wholeheartedly encourage! Other investors might already have accumulated capital and could opt to invest it as a lump sum in one go. Analyzing the fund’s performance for both SIP and lump sum investments over various time periods helps understand how the investment strategy affects returns, and it can help you decide which of the two modes of investment is better suited for your needs.

7. Past Performance vs. Current Performance – Sometimes you will come across a mutual fund that has historically performed well, and consistently, but the same fund has seen a decline in its most recent performance. In such a case, it is important for you to understand the cause of the fund’s sudden decline – whether it is a change in the fund strategy or an influence of market conditions – and make an investment decision accordingly.

Analyzing mutual fund performance is an essential skill that can hugely benefit your investment journey. Understanding the key metrics, comparing with benchmarks and peers, considering expenses, and determining the mode of investment is not independent of mutual fund investments, but is rather a part of that process – and an important part at that!

As the investment landscape evolves, continuous monitoring and analysis of mutual fund investment performance remain critical to ensure investment success and ultimately in helping you with wealth creation.

FAQs

• What is a mutual fund?

A mutual fund is a pooled investment vehicle that collects money from various investors and invests in a diversified portfolio of assets, such as stocks, bonds, and money market instruments. 

• What are some important parameters to track mutual fund investments?

Returns, risk, performance against benchmarks, the expense ratio, and the portfolio composition are some of the key factors to consider when tracking your mutual fund investment.

• What is a fund strategy?

Each mutual fund investment follows a specific investment strategy. You can choose from options such as growth, value, or dividend-oriented mutual funds.

• What is an expense ratio?

The expense ratio is the annual fee charged by the mutual fund investment company to manage the fund. The higher the costs associated with investing, the higher the expense ratio.

• What is a mutual fund investment benchmark?

Every mutual fund investment has a benchmark index that represents the fund’s investment objective. You should compare the fund’s performance against its benchmark to gauge its ability to outperform the market.