HOW TO JUDGE A FUND’S PERFORMANCE

Investing in mutual funds has an inherent risk assumed upon the ownership. However, performance of the mutual funds can be quantified with the mathematical calculation of the historical returns. The correlation of the potential risk and the potential returns constantly put forth the opportunities to invest in mutual funds and drive maximum potential returns with minimum underlying risk.

First, classify the mutual fund to determine if it fits within your scope. For example, if you are seeking a mutual fund that provides steady income, a mid-cap value fund will leave you very disappointed. You can find all the basic facts about a mutual fund and have access to tools that further help you evaluate the fund. In your categorization of the mutual fund, also identify a few peers, or comparable funds from other fund companies, to compare your chosen fund.

Next, review the historical performance data and compare your chosen mutual fund with a few of its peers. Look at the risk-return trade-off for each fund and determine whether it meets your risk tolerance. if a fund assumes a greater risk than average. Ideally, select a fund that assumes low risk but still produces good returns. The balance between the two depends, again, on your risk tolerance and investment objectives.

Quality of stocks in the portfolio is reflected in its ability to drive superior returns on capital invested for a specific period of time. It is wise to check the industry leadership position of the mutual fund. Quality of the stocks in the portfolio would reflect in returns hence in the performance. Qualitative statistics and historical performance of mutual funds would help evaluating the performance.

Track record and competence of the fund manager – Your fund manager is an important person who makes investment decisions and stock selection in the portfolio. Understand your fund manager’s competence according to his/her fund management knowledge and ability. Your fund manager’s past performance would be a good parameter to track his/her record and could turn to be of a great value for your investment

Finally, take a look into the fund’s expenses and fee structure. Active mutual funds that have heavy trading or are very actively managed have higher annual expenses. Factor in these costs as they directly affect your performance. While a fund that charges higher management fees is not necessarily better or worse because of the fees, still be cognizant of reasonable fees for the type of fund you choose. Again, comparing the fund with its peers can reveal whether the fees are reasonable.

Planning to invest in mutual funds? The earlier the better!

One of the most important factors to consider while drawing a financial plan is fixing the time period, especially if you are a beginner. The thumb rule is, the earlier you start, the greater the chance of achieving your financial goals.

Everyone has some goals and responsibility in life, some want to buy a new car and some are planning to retire rich so that they can enjoy their post-retirement life. We all have many dreams, but are we really investing that much time and money on building the corpus to achieve these goals. It is time tested that if one starts investing early, the percentage of building the corpus for one’s desired future financial goals is higher as compared to those who start very late in their life.

Investing according to financial goals.

Identify and priorities goals:

The first step in goal based investing is identifying and prioritising goals by segregating them into needs and wants – needs are essentials and hence get precedence over wants, which are desires and aspirations. Once decided, align your needs/wants to the time horizon.​

Holding Duration

As a young investor one should know the holding duration of any MF categories (for e.g., liquid funds, debt funds, equity funds, hybrid funds, etc.) while investing their money in mutual funds against any financial goal.

Explore the systematic method of investing in mutual funds​

​​Investors can also benefit from the systematic plans offered by the mutual funds. For instance, a systematic-investment plan (SIP) is used for wealth accumulation. A systematic-transfer plan (STP) helps in transferring wealth from one asset to another, in safeguarding the portfolio against volatility, and in adapting to the changing risk appetite with age and increase in responsibilities. Lastly, a systematic-withdrawal plan (SWP) is useful in deriving a regular income from the created wealth created.​​​​

Power of Compounding

Young investors have an advantage in investing since the longer you stay in the market, the less risky your investment becomes and the more corpus you can generate over a period of time. This happens because of the compounding effect and the rupee cost averaging benefit you get over a long term.

Once you are done with prioritizing your financial goals of life, quantify them, that how much amount you may need to achieve those goals and based on that choose mutual fund schemes. So give wings to your dreams and start investing in something each month to achieve your goals without any burden of heavy debt on your shoulder.

ADVANTAGES OF LIQUID MUTUAL FUND

Liquid funds are open ended schemes that invest in debt and money market instruments with maximum maturity of up to 91 days only. Liquid funds can help us earn much higher rates than what the savings deposits offer without compromising too much on how quickly we can get our hands on the cash. Liquid fund have credit ratings which make them safe i.e. less risky for investors.

It is considered as the least risk category in mutual funds, as it does not invest in long term bonds and does not get affected by interest rates movements. The reason that this is considered as a safe bet is because it is generally related to the government sector which can be considered to have a consistent performance. These liquid funds also do not take a long time to mature and can be redeemed in liquid in a single day. People even park their money in a liquid scheme for as less as 2-3 days’ time.

Advantages of liquid funds:

• No entry or exit loads applicable.
• Easy redemption. Takes less than 24 hours.No lock-in period
• Investment in short-term debt securities minimizes the interest rate risk.
• Includes plans like daily, weekly and even monthly dividend plans.

The last one year return of these funds has been in the range of 7%-8% so one can expect such returns in future. Liquid funds come with different plans like growth plans, daily dividend plan, weekly dividend plans and monthly dividend plans. Growth plans don’t declare any dividend, and appreciation of fund is reflected in higher unit value. In liquid funds with dividend plan one get a tax relief on dividend payout.

Mutual funds are answer to your every investment requirement so one need to invest properly. Just know your priority well and only then park your funds wisely.