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.