Mutual funds are subject to market risks, and you must conduct proper research and analysis before investing in any mutual fund. After undertaking this, you must track them regularly. Below, you will learn how to track the performance of a mutual fund scheme.
Benefits of Mutual Fund Investment in India
Mutual funds are the most lucrative and secure investment options that protect you from potential loss. While investing in them, read out the critical benefits that align with your financial goals:
- Lower risk of losing your capital
- Portfolio diversification ensures that you do not lose money on all stocks simultaneously
- Convenient administration, leading to minimal bad deliveries and paperwork
- Affordable costs involved compared to direct capital market investment
- Transparency with the help of a Demat account
- Several mutual fund schemes to match your investment goals and risk tolerance
Importance of Constant Monitoring
You must first open a Demat account and invest in an appropriate mutual fund scheme. However, the story does not end here. It is equally important to monitor your investment regularly. A fund’s past performance does not give assurance of its future. However, it clearly shows how it might perform in the coming period. It reduces your investment risk and maximises the chances of good returns. Regularly checking the funds helps you make better decisions for further changes or investments.
Factors Affecting the Mutual Fund Performance
The performance of a mutual fund largely estimates your returns on investment. Rather than owning a stock, it allows you to share ownership and bifurcate the risk. Given below are a few factors that affect mutual fund performance:
- Performance of Securities
A mutual fund scheme invests in different asset types like equity and debt. The investment goals and asset allocation largely affect its performance. If the underlying equities do well, the mutual fund is also bound to achieve success. That is why you should diversify your holdings across regions, industries, and market capitalisations.
- Fund Manager’s Performance
The fund manager’s approaches and choices significantly affect the fund’s performance. Therefore, assessing and analysing the portfolio and making required corrections in time is essential.
- Fund Size
The fund’s size significantly influences its performance. Although a good cash flow improves its performance, constant monitoring becomes more crucial as its size grows. Large funds with poor management often demonstrate weak performance.
- Fund Cash Flows
A mutual fund pools money from various investors with equivalent financial objectives and risk tolerances. It invests the money in multiple assets and merges their funds. If more investors want to invest in a particular mutual fund scheme, the fund managers can diversify the investments and enhance their chances of generating higher returns. On the other hand, if the fund underperforms, investors sell their interests, causing the fund managers to liquidate, hurting the cash flow and worsening performance.
- Ratio of Expense
The total expense ratio is the costs or fees asset management firms charge their clients. This cost largely affects the returns you receive. A lower ratio of expense boosts your returns, while a high expense ratio leads to lower earnings. Therefore, carefully examine these costs and verify their fees before investing.
Different Ways to Track Mutual Funds
You can employ these effective methods to monitor your mutual funds:
Using a Fact Sheet: When investing in a mutual fund, you will get a fact sheet. It is a reliable source to monitor your fund performance. The institution releases it each month, and it contains all mutual funds available for investment. It includes information about various mutual fund schemes, with their performance, division, size, and investment requirement.
Comparing with Peers: You must check how a mutual fund fares against similar funds in the category. For instance, if the average returns from other mid-cap funds are 18% over three years and your fund has returned only 14%, it indicates that your fund has not performed well during the period.
Viewing the Alpha Ratio: Any fund’s alpha ratio is an assessment of the fund manager’s abilities and policies. It depends on the information about the fund manager’s past performance.
Comparing with a Benchmark: Comparing a mutual fund’s efficiency with a benchmark helps you gain information about the performance of a mutual fund scheme. You can easily get data about the fund of peers and set it as a benchmark to track performance. Compare the average returns over time and see if they reach the threshold.
Monitoring Consistency: Funds that perform consistently are recommendable. Typically, a fund must outperform its peers and set benchmarks in bear and bull market conditions.
Mutual fund investments are excellent mediums to bring diversity to your portfolio. Undoubtedly, it is one of the most popular and lucrative ways to invest your hard-earned money and earn returns. Use the above methods to closely monitor your mutual fund investments and track their performance. Open a Demat account today to track its performance online and act according to your risk appetite. Right investments and constant monitoring will help generate long-term returns without putting your money at high risk.