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How to check mutual fund performance: A guide for 2025

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Mutual Fund Performance
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If you think that just investing in mutual funds is enough to potentially grow your money over time, that is not true. Making the investment is just one element of the process. Selecting a suitable scheme and regularly monitoring and evaluating its performance are equally essential. Therefore, it is crucial to know how your mutual funds are performing and whether you should continue with your current investment, switch funds, or rebalance your portfolio.

In this article, we will explain what mutual fund performance is, how to evaluate it and why it is important to review your investments periodically.

  • Table of contents

Explaining mutual fund performance

Mutual fund performance refers to the potential returns that a mutual fund has delivered over a specific period. It indicates whether the fund has met or exceeded investors' expectations. Several factors influence mutual fund performance, including market conditions, fund management, asset allocation and expense ratios.

A well-performing mutual fund is one that has the potential to outperform its benchmark and category peers in the long term, without taking on undue risk.

While assessing a fund’s performance, it is important to note that occasional short-term dips can happen for several reasons, such as market volatility, macroeconomic shifts, temporary underperformance of a few sectors in a portfolio. In some cases, the fund manager may have a strategy that has the potential to deliver returns in the long-term but may not show immediate gains. Thus, brief underperformance may not reflect the fund’s true potential. However, if a fund consistently underperforms over the long term — especially across market cycles — it may be a sign to reassess its suitability in your portfolio.

Read Also: What is a mutual fund: Meaning, types, and benefits

Evaluation of mutual fund performance

Check the historical returns

First of all, look at the fund’s historical returns* over different time frames, such as 1 year, 3 years, 5 years, and 10 years. Compare these returns with your investment objectives and expectations. A consistent performer over a long period may be more suitable than a fund with high short-term gains but inconsistent performance.

*Past performance may or may not be sustained in future.

Compare with similar funds

Compare the mutual fund with other funds in the same category. Look at funds with similar investment strategies and asset classes to get a fair comparison. If a fund consistently underperforms compared to its peers, it may not be performing along expected lines.

Evaluate the fund’s performance against the appropriate benchmark

Every mutual fund is benchmarked against a specific market index (such as NIFTY 50, BSE Sensex etc). Check whether the mutual fund has outperformed or underperformed its benchmark over different periods. If a fund consistently lags behind its benchmark, it may indicate weak management or suboptimal investment strategies.

Analyse risk-adjusted returns

Risk-adjusted returns measure how much return the fund generates for the level of risk taken. Metrics like the Sharpe ratio, Sortino ratio and alpha help assess the risk-adjusted performance. For example, a high Sharpe ratio indicates better returns per unit of risk taken.

Examine the fund manager’s track record

A fund manager’s expertise and decision-making skills play a crucial role in performance. Check the fund manager’s history, experience and performance with other funds they have managed. If a fund’s performance changed significantly after a new manager took over, it’s worth analysing their track record.

Look at expense ratios and other fees

Mutual funds charge an expense ratio, which covers fund management fees and administrative costs. A high expense ratio can eat into your net returns over time. Compare expense ratios of similar funds to ensure you are not overpaying for fund management.

Monitor portfolio composition and asset allocation

Check the proportion in which the fund is investing in stocks, bonds or other assets and whether it aligns with the scheme’s stated objectives and your risk tolerance. Look for sectoral biases or over-concentration in certain industries that might increase risk.

Read Also: What are mutual fund units?

Why should investors evaluate the performance of a mutual fund?

  • To assess alignment with financial goals: If a fund is consistently underperforming the market and its peers, you may need to switch to a better-performing one so that you can potentially meet your financial goals.
  • Identifies underperforming funds: You can avoid losses by exiting funds that consistently underperform.
  • Optimises returns: Reviewing your investments helps you optimise return potential by reallocating funds to better-performing options.
  • Manages risks: If a fund becomes too risky, you can shift to one with better risk-adjusted return potential.
  • Keeps you updated on market changes: Market conditions change frequently, and reviewing your portfolio helps you stay informed.

Conclusion

Evaluating mutual fund performance is an important aspect of successful investing. By analysing historical returns, comparing with benchmarks, checking expense ratios and reviewing risk-adjusted returns, you can make better investment decisions. Regularly monitoring your mutual fund investments can help them stay aligned with your financial goals and risk appetite.

FAQs:

What key metrics should I use to evaluate mutual fund performance?

You should look at historical returns, benchmark comparison, risk-adjusted returns (Sharpe ratio, alpha), expense ratio, and fund manager track record.

How can I compare the performance of different mutual funds?

  • Compare funds with similar investment objectives and categories.
  • Compare returns with the benchmark to assess if the fund is outperforming or underperforming the market.
  • Check metrics like Sharpe ratio and Alpha for risk-adjusted performance.

How often should I review my mutual fund’s performance?

It is recommended to review your mutual fund performance at least once every 6 months. Major life changes, market fluctuations or fund manager changes may require more frequent reviews. If a fund consistently underperforms, consider switching to a better-performing one.

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By Soumya Rao
Sr Content Manager, Bajaj Finserv AMC | linkedin
Soumya Rao is a writer with more than 10 years of editorial experience in various domains including finance, technology and news.
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By Shubham Pathak
Content Manager, Bajaj Finserv AMC | linkedin
Shubham Pathak is a finance writer with 7 years of expertise in simplifying complex financial topics for diverse audience.
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Position, Bajaj Finserv AMC | linkedin
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

 

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.

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Author
Soumya Rao
Sr Content Manager, Bajaj Finserv AMC | linkedin
Soumya Rao is a writer with more than 10 years of editorial experience in various domains including finance, technology and news.
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