How to evaluate MF performance

Just as you evaluate the performance of the portfolio of stocks, so also you should evaluate the performance of the mutual fund schemes in your mutual fund portfolio. There are time-tested methods to evaluate the performance of mutual fund schemes, so let us understand these methods and how to utilise them to evaluate the performance of MF schemes.

First and foremost, you need to identify the product category of the scheme so that you compare apples with apples, instead of oranges. So, first get to know whether the MF scheme is an equity, diversified, debt, sectoral or thematic scheme. The correct identification of the category will help you to compare the scheme with schemes belonging to the same category of other mutual fund houses.

Next, you should compare the performance of the mutual fund with the performance of the benchmark as well as with funds of the same category. Check whether the fund has underperformed or outperformed the benchmark index and for how many quarters it has outperformed or underperformed the index. Then, compare the performance of the fund with the same category of funds and check its ranking within the category. If the fund has outperformed the benchmark as well as the category, one can safely conclude that the fund’s performance is excellent and you can remain invested in the fund. Of course, past performance does not provide any guarantee about the fund’s future performance, but it is a good indication of the likely future performance of the fund. Also, while looking at the performance, check the expense ratio and the turnover ratio of the fund, which will indicate whether the fund manager churns the portfolio often resulting in higher expenses to the investors.

Finally, check whether the fund has followed the portfolio allocation strategy and has stuck to its stated objective. This can be done by looking at the portfolio of various investments made by the fund in terms of stocks, sectors, asset classes and market caps. The composition of the portfolio would indicate whether the fund has remained true to its objective and investment strategy.