Mutual Fund Performance Metrics

Mutual fund performance metrics: Understanding NAV, expense ratios, and total returns

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There are several ways of evaluating a mutual fund scheme. Investors can follow the methods mentioned in this article to evaluate a mutual fund’s performance before investing in it.

Evaluating a mutual fund through certain key metrics:

  • Check the risk-adjusted returns offered by the mutual fund: You must always assess your risk appetite before investing in a mutual fund scheme. While evaluating a mutual fund’s performance, you must consider its risk-adjusted returns. These are the returns earned by the fund after comparing the returns generated by the fund with the risk taken. You can measure risk-adjusted returns by calculating a fund’s Sharpe ratio. You can calculate a fund’s Sharpe ratio by subtracting the risk-free rate of return from the fund’s return, and then dividing that number by the fund’s volatility.
  • Check the fund’s expense ratio and NAV (net asset value): The fees charged by a mutual fund like the expense ratio and NAV have a significant impact on the returns earned through the fund. An expense ratio is the fee charged by the fund house to manage your mutual fund portfolio. Some of the charges included in this fee are manager fees, investor transactions, and several other charges. While evaluating a mutual fund, you must check if it charges a reasonable expense ratio.
  • Compare similar funds to find the one that offers higher returns: You must also compare similar mutual funds using a mutual fund returns calculator. Doing so can help you decide on the mutual fund that suits you best. Remember to compare similar mutual funds (in terms of category) while using an online mutual fund returns calculator. It helps to start with a shortlist of mutual funds and compare multiple funds to find the one that suits you best.
  • Analyse the performance of the fund relative to its benchmark index: Every mutual fund is linked to a benchmark index. The performance of a fund is considered good if it generates higher returns than its benchmark index. The amount that it generates extra is called the ‘alpha’ of the mutual fund. You can analyse this alpha value to analyse the fund’s performance relative to its benchmark index.
  • Read about the fund’s management and know the fund manager’s tenure: You must know the fund’s management style to effectively evaluate the fund’s performance. Knowing the fund manager’s tenure also helps individuals assess the experience and knowledge of the fund manager.
  • Consider consulting a financial advisor to take the right investment decisions: Finally, you must also consider consulting a financial advisor. As a first-time investor, your resources to learn more about the market might be limited and relying on the wrong resources might lead you to take the wrong financial decisions. You can rely on the expertise of a financial advisor to fill this knowledge gap.

While it may be difficult to accurately predict the future performance of a mutual fund scheme, the points mentioned in this article can help you pick the ideal mutual fund for you.

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