A Comprehensive Guide to Mutual Fund Analysis and Evaluation (2024)

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Are you giving mutual fund analysis the attention it deserves in your investment journey? If not, it’s time to shift gears. Neglecting the critical step of analysing a mutual fund’s performance before purchasing can significantly affect your investment portfolio. Therefore,inthis blog, we’ll explore the importance of mutual fund analysis and how you can easily do MF analysis.

What is Mutual Fund Analysis?

Mutual fund analysis evaluates a fund’s past performance, risk profile, and investment strategy to determine if it aligns with your financial goals and risk tolerance. It’s like dissecting a fund to see if it’s the right fit for you.

Here’s what you analyse during MF research:

• Performance: How well has the fund returned compared to benchmarks like indexes or similar funds? Are the returns consistent, or do they fluctuate?
• Risk: How volatile is the fund? Does it invest in risky assets like small-cap stocks or focus on safer options like bonds?
• Investment Strategy: What assets does the fund hold? Does it follow a growth, value, or income-focused approach? How active is the manager in making investment decisions?

Factors to Consider Before Researching Mutual Funds

Before researching mutual funds, it’s essential to consider your investment objectives, whether you’re planning for a vacation, buying a house, retirement, or more. Given that investment strategies vary based on different financial goals that can be short-term or long-term, it is best to consider several factors. Here are some key factors to evaluate:

Goals and Risk Tolerance

• Define your Investment Goals: What are you saving for? Retirement, a child’s education, a down payment on a house? Each goal has different timelines and return expectations.
• Assess Your Risk Tolerance: How comfortable are you with potential losses? Higher potential returns often come with increased risk. Understanding yourrisk tolerancehelps narrow down suitable fund categories.

Investment Horizon

• Match the Fund’s Timeline: Consider how long you plan to invest. Long-term goals permit aggressive funds, while short-term needs may require low-risk options.

Fund Type and Category

• Equity Funds:Invest in stocks aiming for higher returns but greater volatility. Based on risk tolerance, choose large-cap (established companies), mid-cap (medium-sized businesses), or small-cap (growing companies).
• Debt Funds:Invest in bonds for lower risk and steady income. Options includegovernment bonds, corporate bonds, and short-term/long-term debt funds.
• Hybrid Funds:Combine equities and debt for balanced risk and moderate returns. Allocate more to equities for growth or debt for stability.

Fund Performance and Management

• Analyse Past Performance:Analyse mutual funds’ historical returns over different market cycles, not just duringbull markets. Compare their performance to benchmarks and similar funds during mutual fund performance analysis.
• Evaluate the Fund Manager:Consider afund manager’sexperience, track record, and investment philosophy.

Fees and Expenses

• Expense Ratio:This covers fund operating costs deducted from your returns. Lower ratios can be preferable.
• Loads:Some funds charge entry/exit loads (commissions for buying/selling units), but no-load funds are generally cheaper.

Parameters to Analyse Mutual Fund Performance

Analysing mutual fund performance is one of the mostimportantfactors in investment management. Therefore, we have listedcertainparameters to consider when analysing mutual fund performance.

Analyse Fund Performance vs Benchmark Performance

It’s essential to compare your mutual fund’s performance against a suitable benchmark to understand its performance relative to the market. A benchmark is like a standard index or a bunch of securities representing the market or a particular sector. By comparing your fund’s returns to its benchmark, you can see if it’s doing better or worse in the market. For example, the benchmark for the Parag Parikh Flexi Cap Fund will be NIFTY 500 – TRI.

Expense Ratio of Funds

The expense ratio is super important to think about when you’re doing MF analysis. It shows the yearly fees and costs the fund company charges for running the fund. This fee covers the costs of operating the fund, such as management fees, administrative costs, and other expenses like marketing, distribution, and any additional costs specific to the fund.

Study Fund History

When analysing fund performance, it’simportantto study its history. Itinvolves looking at how the fund has performed over different periods, such as the past one year, three years, five years, etc. By examining the fund’s historical performance, investors can gain insights into its consistency, volatility, and long-term growth potential. Additionally, studying fund history allows investors to evaluate how the fund has performed during various market conditions, helping them make informed investment decisions.

Check Portfolio Turnover Ratio (PTR)

Next, check the Portfolio Turnover Ratio (PTR). This is important when analysing fund performance because it gives insight into how frequently the fund buys and sells assets within the portfolio. A high PTR may indicate higher trading activity, increasing transaction costs and taxes and potentially impacting overall returns. On the other hand, a lower PTR suggests less frequent trading, which may result in lower costs and taxes, potentially benefiting investors in the long run.

Evaluating Fund Maturity Periods

Next on the list is comparing fund maturity periods. This comparison aids investors in comprehending the duration over which the funds have been under management. The selection of an appropriate maturity period for your chosen fund is guided by our investment objectives. For instance, if your financial goal is short-term, such as saving for a down payment, it would be important to concentrate on debt funds with maturities that correspond to your timeline. On the other hand, equity funds with extended maturity periods may be more suitable for long-term wealth accumulation purposes.

Compare Risk-Adjusted Returns

While evaluating mutual fund performance, it’s important to look at risk-adjusted returns. These risk-adjusted returns mean how much risk was taken to make those returns. Here are some important things to look at:

• Standard Deviation: Standard Deviation measures how spread out a set of numbers is from its average. Therefore, the higher the standard deviation, the higher the risk.

• Sharpe Ratio: The Sharpe Ratio measures how the asset is performing against the benchmark.

• Beta: The Beta of a mutual fund is the volatility of the scheme relative to its benchmark.

Checklist of Qualitative Factors for Mutual Fund Selection

Is the Fund Aligned with the Investment Goals?

Thisis paramount. Ensure the fund matches your objectives—whether conservative or aggressive. Consider if its strategy aligns with stability or growth.For instance,choosedebt funds for income stability rather than dynamic approaches.Opt for index funds or ETFs for index-level returns to avoid active equity risks and higher expenses.

Evaluate the Fund Management Team’s Experience and Continuity

Longevity matters as it ensures consistency in strategy and cohesion among team members. Stable management teams indicate better performance over time due to continuity and consistent decision-making.

Consider the Fund’s Overall Cost

Look beyond the expense ratio, considering exit loads and disclosed expenses. Equity funds typically have higher ratios compared to index funds. Compare costs before investing.

Understand Tax Implications on Entry and Exit

Different funds attract taxes, such as short-term capital gains (STCG) for equity funds sold within a year and STCG for debt funds before three years. Long-term capital gains (LTCG) on equity funds above Rs. 1 lakh are taxed at 10%, while for STCG, the tax rate is 15%. Consider exit loads, impacting eventual returns.

How to Conduct a Mutual Fund Research?

First, select the right type of mutual fund. With the help of a mutual fund screener, you can easily add filters and comb out the best mutual funds in India within minutes.

• The fund manager’s investment strategy plays a crucial role in determining the allocation of your invested funds. If the approach adopted by the fund does not align with your financial goals, it may not contribute positively to your portfolio. Many mutual fund analysis tools provide information about the fund’s type and composition, allowing you to make well-informed decisions. For example, if you want to invest in a low-risk debt fund, you might opt for a fund company with a specialisation in such funds.

• When considering long-term investments, examining historical earnings as part of mutual fund data analysis isimportant. Reviewing the fund’s performance over the last 5-10 years can provide valuable insights into its overall track record.

• Mutual fund portfolio analysis is valuable for assessing a fund’s stability and performance across various market conditions. It provides insights into how the fund has historically behaved. However, it’s important to note that past performance doesn’t guarantee the fund’s future returns.
• Since most mutual funds are actively managed, another important factor is the fund manager’s tenure. Make sure to conduct thorough research on the fund manager as part of your mutual fund performance analysis.

• Mutual fund investing involves charges. One is the expense ratio, an ongoing fee deducted from your invested amount by the fund company for managing your fund. The Securities and Exchange Board of India (SEBI) has set a maximum limit of 2.5% for the expense ratio. Although it might not look like much initially, over time, it can accumulate to a substantial sum. Consider choosing funds with lower expense ratios in your mutual fund portfolio analysis to minimize this cost.

To Wrap It Up…

In conclusion, a thorough mutual fund analysis can be crucial for making informed investment decisions. Investors can tailor their portfolios by assessing factors to align with their financial objectives. Regular review and adjustments based on changing circ*mstances ensure your mutual fund portfolio remains in line.

As always, it’s important to do your own research and/or consult a financial advisor before investing.

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