How to Analyse Mutual Fund Performance?

A mutual fund’s recent performance tells only part of its story. Two schemes may report similar historical results while taking different levels of risk, holding different securities or charging different expenses.

Learning how to analyse mutual fund performance involves looking beyond a single number. It requires comparing a scheme with its stated benchmark and relevant peers, examining costs and reviewing its behaviour across market conditions. Fund manager tenure and portfolio risks also provide context that performance figures alone may leave out.

This blog explains the steps involved in mutual fund performance analysis, from benchmark comparison and expense evaluation to risk assessment and management review. It also outlines how to use scheme disclosures to support your research.

Understanding mutual funds

A mutual fund pools money from multiple investors and invests it in securities such as shares, bonds and money market instruments. An asset management company (AMC) manages these investments according to the scheme’s stated investment objective. In India, mutual funds are regulated by the Securities and Exchange Board of India (SEBI).

Investors receive units representing their holding in the scheme. The net asset value (NAV) reflects the scheme’s net assets per unit. It changes as the value of the underlying investments changes. Consequently, investors may experience potential gains or losses.

Some basic aspects to understand include:

• Investment objective: Each scheme follows a defined investment mandate, which determines its asset allocation and investment approach.
• Risk exposure: Risks vary with the underlying assets. Equity investments face market fluctuations, while debt investments carry risks including credit risk and interest rate risk.
• Costs: The expense ratio represents scheme management and operating expenses. These expenses affect NAV and potential returns.
• Diversification: Investing across securities may reduce concentration risk, but it does not eliminate market risk or prevent losses.

Factors to consider before researching mutual funds

Before researching mutual fund schemes, understanding your financial circumstances may help you define relevant selection criteria. This involves identifying what you are investing for, when you need the money and how much uncertainty you are willing and financially able to accept.

• Financial goals: Define the purpose of each investment, such as retirement or education. Estimate the amount required, accounting for inflation, to give your research a specific direction.
• Investment horizon: Identify the time available before each goal. Equity funds involve market risk and may be suitable for long-term growth potential, depending on your risk appetite. A longer horizon does not eliminate losses.
• Risk appetite and capacity: Consider both your comfort with fluctuations and your financial ability to absorb losses. Income uncertainty, dependants and existing obligations may limit this capacity.
• Investable surplus: Assess the amount available after essential expenses, loan repayments and emergency provisions. This may help you evaluate a manageable investment commitment.
• Liquidity needs: Consider whether you may need access to the money unexpectedly. Lock-in periods, redemption timelines and exit loads become relevant during scheme research.
• Existing investments: Review your current asset allocation. Identifying concentrations in particular assets or sectors may help you research schemes that support diversification, although diversification does not eliminate investment risk.

How to perform mutual fund research?

Mutual fund research involves examining a scheme’s mandate, portfolio, risks, costs and historical performance. Begin with categories that may align with your financial goals, investment horizon and risk appetite, then assess individual schemes using current disclosures.

• Read scheme documents: Review the Scheme Information Document, Key Information Memorandum and subsequent updates on the AMC’s website. Examine the investment objective, asset allocation limits, investment strategy and stated risks.
• Examine portfolio holdings: Assess exposure to individual securities, sectors and issuers. For debt schemes, review credit quality and interest rate sensitivity. Check for overlap with your existing investments.
• Evaluate risk: Review the latest Riskometer alongside historical fluctuations and declines in value. The Riskometer indicates scheme risk; it does not predict losses.
• Compare historical performance: Use identical periods, comparable plans and options, the scheme’s benchmark and peers within the same category. Examine different market conditions. Past performance does not guarantee future results.
• Review management and costs: Examine the fund manager’s tenure, investment process, expense disclosures and exit load. Costs affect potential returns.
• Check access and taxation: Review redemption timelines, applicable lock-ins and prevailing Indian tax provisions.

Why measure the performance of a mutual fund?

Measuring a mutual fund’s performance may help investors assess whether the scheme continues to meet their investment needs. It provides context for reviewing progress towards financial goals, the risks experienced and the scheme’s performance relative to its benchmark.

• Assess progress towards goals: Reviewing investment value alongside contributions may help identify a gap between the accumulated amount and the amount required for a goal. This assessment does not establish future growth potential.
• Understand performance in context: Comparing a scheme with its stated benchmark and peers within the same category, over identical periods, may help distinguish broader market movements from scheme-specific outcomes.
• Evaluate the risks involved: Performance figures alone do not explain the fluctuations or losses experienced along the way. Reviewing volatility and declines alongside performance may help assess whether the investment remains consistent with your risk appetite.
• Examine performance across market conditions: Looking at several periods may reveal patterns that a single recent result overlooks. These observations do not guarantee that similar outcomes will continue.

Mutual fund performance analysis: Key steps for informed investing

1. Benchmark comparison

A benchmark provides a reference point for assessing a mutual fund’s historical performance. Comparing a scheme with its stated benchmark may help explain how it performed relative to the market segment that the index represents.

Consider these aspects when making the comparison:

• Use the stated benchmark: Refer to the benchmark disclosed in the scheme’s factsheet. Compare identical start and end dates using equivalent performance measures.
• Understand the index: For equity schemes, a total return index includes constituent companies’ distributions and their reinvestment. It provides a broader measure than an index tracking price movements alone.
• Examine several periods: Reviewing different periods may reduce reliance on a single recent result. Rolling-period analysis examines overlapping investment periods to assess how frequently a scheme performed above or below its benchmark.
• Consider the investment approach: Active schemes and index funds have different objectives. For an index fund, assess how closely it tracks its designated index, including the effects of costs and tracking differences.
• Review the risks: A scheme performing above its benchmark may still experience losses during a market decline. Portfolio exposures and risk levels provide context.

Historical outperformance does not establish future return potential or suitability. Interpret benchmark comparisons alongside your financial goals, investment horizon and risk appetite.

2. Peer group comparison

Peer group comparison involves evaluating a mutual fund alongside schemes within the same category. It may help investors assess whether observed performance reflects broader category trends or differences in portfolio construction and management.

Start by selecting schemes with comparable investment mandates. Comparing a large cap fund with a small cap fund may be misleading because their investment universes and risk exposures differ. Even within a category, schemes may vary in sector allocation, investment style and portfolio concentration.

For a meaningful assessment, consider:

• Comparable plans and options: Compare direct plans with direct plans and equivalent investment options.
• Matching periods: Use the same dates and examine performance across several periods.
• Portfolio differences: Check whether concentrated holdings or particular sector exposures contributed to the results.
• Risk differences: Review fluctuations and declines alongside historical performance.

Category averages provide context but may conceal differences between individual schemes. Rankings also change with the period selected and the schemes included in the comparison.

3. Expense ratio evaluation

The expense ratio expresses a scheme’s recurring expenses as a percentage of its average net assets. These expenses affect the net asset value (NAV) and, consequently, potential returns.

Consider these aspects when evaluating expenses:

• Check current disclosures: Review the latest expense figures on the AMC’s website. Expense ratios may change, so an older factsheet may not reflect current charges.
• Compare similar schemes: Evaluate costs among schemes with comparable mandates and investment approaches. A lower expense ratio alone does not establish suitability.
• Understand plan differences: Direct plans exclude distribution commissions and generally have lower expense ratios than regular plans of the same scheme. Plan selection also involves considering your ability to research independently and any assistance required.
• Avoid counting expenses twice: Published NAV-based performance already reflects expenses deducted from scheme assets. Subtracting the expense ratio again would count the same expense twice.
• Review separate charges: Exit loads and applicable investor taxes are separate from the expense ratio. Consider these when assessing the costs of holding and redeeming an investment.

4. Understanding economic cycles

Economic cycles provide context for interpreting mutual fund performance. Changes in economic activity, inflation, interest rates and corporate earnings may affect the securities held by a scheme. Their effects vary across portfolios and investment approaches.

During economic expansion, some businesses may experience increased demand and earnings. However, equity prices also reflect valuations and expectations, so economic expansion does not guarantee potential gains. During a slowdown, weaker business conditions may affect companies differently depending on their sector, borrowing levels and operating circumstances.

Interest rate movements are relevant to debt schemes. Bond prices generally move in the opposite direction to market yields, with longer-duration portfolios typically more sensitive to these movements. Credit conditions and issuer-specific developments also influence performance.

When reviewing a scheme, examine its behaviour during different conditions:

• Periods of rising and falling interest rates.
• Phases of accelerating and slowing economic activity.
• Episodes of market declines and recovery.

This context may help explain whether a particular market environment favoured the scheme’s holdings or investment style.

Economic cycles are difficult to identify in advance, and markets may respond before economic data confirms a change. Cycle analysis therefore supports understanding historical outcomes; it does not provide a reliable basis for predicting performance or timing investments.

5. Risk assessment

Risk assessment examines the possibility of losses and the factors that may cause a scheme’s value to fluctuate. It helps investors evaluate whether the exposure is consistent with their financial capacity, investment horizon and comfort with uncertainty.

Begin with the latest Riskometer and the risks disclosed in scheme documents. The Riskometer summarises the scheme’s risk level, but it does not specify the amount an investor might lose. Its classification may change as portfolio risks change.

Examine the underlying exposures:

• Equity risk: Review concentration in individual companies, sectors and market capitalisation segments.
• Debt risk: Assess credit quality, interest rate sensitivity and exposure to individual issuers.
• Liquidity risk: Consider whether portfolio securities may be difficult to sell during stressed market conditions.
• Portfolio overlap: Check whether existing investments create repeated exposure to similar holdings.

Historical volatility and drawdowns may provide additional context. A drawdown measures a decline from a previous peak to a subsequent trough. Neither measure establishes a limit on future losses.

6. Fund manager tenure

Fund manager tenure indicates how long the current manager has been responsible for a scheme. A scheme’s published performance history may include periods managed by different individuals or teams.

Consider these aspects when reviewing tenure:

• Check the appointment date: Refer to the latest factsheet and compare the manager’s tenure with the periods being evaluated. Performance before their appointment cannot be attributed to them. For jointly managed schemes, examine each manager’s responsibilities.
• Assess experience across market conditions: A tenure spanning different market conditions may provide more evidence for reviewing investment decisions. Length of service alone does not establish skill or future return potential.
• Review the supporting process: Consider relevant experience, adherence to the scheme’s mandate and the AMC’s research and risk management processes.
• Examine portfolio changes: Check whether management changes coincided with shifts in concentration, investment style or trading activity. These developments may warrant further research without necessarily indicating a problem.
• Put previous experience in context: A manager’s performance at another scheme reflects its mandate, team support and market conditions. These differences may limit comparisons.

Why choose Bajaj Finserv AMC for investing in mutual funds?

Bajaj Finserv AMC may be considered by investors for the following reasons:

• INQUBE investment philosophy: Bajaj Finserv AMC combines information analysis, quantitative analysis and behavioural finance in its investment approach. This framework considers data alongside the influence of investor behaviour on markets.
• Online investment access: Investors can use its online platform to invest through a systematic investment plan (SIP) or a lump sum, subject to scheme terms and applicable requirements.
• Access to disclosures: Its website provides factsheets, scheme information and historical NAV data. These resources may support an assessment of portfolio holdings, costs, risks and historical performance.
• Investor education and assistance: Its knowledge centre offers educational articles, while telephone, email and WhatsApp channels provide access to investor support.

How to invest in mutual funds through Bajaj Finserv AMC

Investors can invest through Bajaj Finserv AMC’s website by accessing its investor portal. Before initiating a transaction, review the selected scheme’s objective, Riskometer, expenses and investment terms to assess whether it may be suitable for your financial goals.

1. Visit the official website: Open Bajaj Finserv AMC’s website and select the investment link to access the investor portal.
2. Register or log in: Enter the requested details, including your mobile number and PAN, and complete the verification process. Existing investors can log in using their credentials.
3. Complete applicable requirements: Check your Know Your Customer (KYC) status and provide any documents or information requested. Complete your personal details, bank information and applicable declarations.
4. Select the scheme and investment details: Choose the scheme, plan and option after reviewing their features. Specify a lump sum investment or a systematic investment plan (SIP), subject to the scheme’s minimum investment requirements.
5. Authorise payment: Follow the payment instructions. For an SIP, complete the applicable payment mandate and select the available instalment schedule.
6. Review the confirmation: Check the transaction status and account statement after processing. Retain your folio details for subsequent transactions and tracking.

Conclusion

Analysing mutual fund performance involves examining historical results alongside the risks, costs and investment decisions behind them. A scheme’s recent performance alone does not establish whether it may be suitable for your financial goals.

Benchmark and peer group comparisons provide context when the periods, categories, plans and options are comparable. Reviewing expense ratios, portfolio exposures and fund manager tenure adds detail to this assessment. Understanding economic conditions may also help explain why a scheme performed differently across periods, without implying that those outcomes will repeat.

The purpose of this analysis is to assess suitability and support informed decisions. Your investment horizon, liquidity needs, existing asset allocation and ability to absorb losses remain relevant throughout the review.

FAQs

How can investors analyse a mutual fund?

How to analyse mutual funds is a very common question new investors have. Investors may analyse a mutual fund by reviewing its objective, portfolio, Riskometer, expense ratio and fund manager’s tenure. Compare performance across market cycles with its stated benchmark and category peers.

Why is benchmark comparison important?

Benchmark comparison places a scheme’s performance in the context of the market segment it represents. Comparing identical periods helps assess whether an actively managed scheme outperformed or underperformed its stated benchmark.

May investors rely only on past performance?

No. Past performance reflects earlier market conditions and does not guarantee future potential returns.

How often may investors review mutual fund performance?

A review every six to twelve months may help investors assess performance and continued suitability. Earlier reviews may be useful following changes in financial goals, fund management, investment strategy or risk levels.

How does risk affect mutual fund performance?

Risk affects fluctuations in a mutual fund’s value and the possibility of losses. Equity exposure involves market risk, while debt holdings face interest rate and credit risks. Greater risk does not assure greater potential returns. Review the Riskometer and portfolio composition; diversification may reduce concentration risk without eliminating possible losses.