What To Remember When Investing In Mutual Funds

 What To Remember When Investing In Mutual Funds

What comes to mind when you think of Mutual Funds? Volatility and market risks. A Mutual Fund’s performance must be monitored regularly. Read on and we’ll tell you how you can review a fund’s performance.

Measure Performance

When you need to analyse the performance of a Mutual Fund scheme, you should not only look at the returns offered by the fund, you should also consider the NAV. In case the Net Asset Value (NAV) of the fund falls below its benchmark, it means that it’s time to review your investment.

You could compare the fund’s returns against its benchmark returns. Ideally, the scheme should be able to beat its benchmark consistently. Note that the benchmark will usually be an index such as the BSE Sensex and will differ from one fund to another. Also, the benchmark chosen by the fund house needs to be relevant to the fund. So, be careful when a fund house says their fund beat the benchmark. You need to be sure the benchmark is right and the returns are significantly higher than the benchmark.

How Often To Review?

You don’t need to review the performance of the fund every time the markets move up or down by a few 100 points. What would help is to review the performance between 18-24 months. Before you select your fund, analyse the performance of the fund over the last 4-5 years.

What To Look For?

When reviewing the performance of the fund, the reason for underperformance must be studied carefully. Over a subsequent 2-3 quarters, you must watch out for any improved performance. If a fund shows constant under-performance over 3-4 quarters, you should consider a review of your investment portfolio. The best way to go about it is to compare the fund to its peers. Are peers also underperforming? Then, it might be the market. Also, look at the category average. For instance, if the fund’s category is equity diversified, check the average return for equity diversified funds to get an idea about how your fund is performing. If the fund continues to underperform its peers for over a year or two, it might be time to go for a new fund.

Review Risk Adjusted Returns     

What are risk adjusted returns? It is how you find out how much returns your investment will generate, considering the level of risk in the fund. For an investor, high returns at low risk is preferable.

What Schemes To Look For?

Mutual Fund schemes that show high risk-adjusted returns are a more popular choice for investors.

Don’t Worry About The Fund Portfolio

Remember, while reviewing Mutual Fund schemes, you don’t need to look into any factors specific to a fund’s portfolio. Don’t worry about that. Leave it to the fund manager.

Smart Tips To Remember

• If you review the performance of your chosen funds too often, it may lead you to take impulsive decisions.
• Don’t allow a month’s or a quarterly dip in the NAV to push you to stop your Systematic Investment Plan or exit the fund.
  Now you’re prepared to make an informed decision about Mutual Funds.

Happy Investing

Source:Bankbazaar.com