Investing in mutual funds? Check this out!

You should consider both the risk and the return while investing in mutual funds. In this piece, we'll go over some of the items you should consider before investing in mutual funds.

There are numerous alternatives available to investors when it comes to mutual fund investing. Though this is a positive thing, with over 1,500 schemes to choose from and more being created all the time, investors are frequently stumped. As a result, for the sake of convenience, they invest in a fund with the largest trailing returns. 

This, however, proves to be devastating because past performance does not guarantee future results. As a result, we have SEBI-registered investment advisors (RIA) and the Association of Mutual Funds in India (AMFI)-registered mutual fund distributors (MFD) who assist investors. If you are a Do-It-Yourself (DIY) investor who invests directly in mutual funds, however, there are three characteristics that will assist you to choose better funds, including returns. 

Rolling Returns 

Rolling returns sometimes referred to as rolling period returns, are annualized average returns for a timeframe that have been rolled daily during the chosen period. Let's say you're looking at a 10-year period from 2012 to 2021 and you want to know what the average three-year rolling returns are. Then, on a daily basis from 2012 to 2021, you'll compute the annualised three-year returns. 

This implies that the first three years will run from January 1, 2012, to December 31, 2014, the second from January 2, 2012, to January 1, 2015, the third from January 3, 2012, to January 2, 2015, and so on. Rolling returns are important for determining the consistency of returns, which can then be used to estimate the returns you may expect from a certain fund. 

Information Ratio 

The information ratio compares the volatility of mutual fund portfolio returns to the volatility of its benchmark, which is generally an index. 

The information ratio is frequently used to assess a fund manager's potential to outperform its benchmark in terms of returns. Furthermore, by including standard deviation into the computation, it aims to determine the consistency of the performance. 

Maximum Drawdown 

The biggest practicable loss from a portfolio's peak to trough before it reaches a new peak is known as a maximum drawdown. It's expressed as a percentage. Maximum drawdown is a great indicator of risk on the downside. 

This parameter may be used in two ways: as an independent measure and as part of a larger analysis. Otherwise, you may combine it with additional measures like the Calmar ratio, which is comparable to the Sharpe ratio in the calculation. The only distinction is that the Sharpe ratio measures risk using standard deviation, whereas the Calmar ratio measures risk using maximum drawdown.