Whenever you are investing in some monetary instrument, it is advisable to have basic knowledge of finance and economic market. For example, if you want to invest in any one of the top performing mutual funds, you can always take the help of a mutual funds calculator. A mutual fund calculator is easily available online for free.
Evaluate Mutual Fund Performance
- Investment goal – The first thing is to define your investment goal. If you want to gain short term wealth, then investing in debt funds will suit the purpose. If you want to generate long term wealth and have a higher appetite for risk, investing in an equity scheme will suffice. Thus, it is important to define the purpose of your investment. Also, a good mutual funds calculator will enable you to evaluate the top performing mutual funds with ease.
- Compare similar funds – Another way to evaluate the top performing mutual funds other than using a mutual funds calculator is to simply compare similar funds of the same category. This will help you understand the basics of mutual funds.
- Historical data – Although mutual fund’s historical data has got no connection with its future performance, it is advisable to check it either way. Historical data will help you understand the fund’s performance over the years, skills of the fund manager, etc. Many mutual funds calculator come with an option to check historical performance.
- Fee structure – Mutual fund is managed by a fund house or Asset Management Companies (AMCs). All AMCs charge a nominal fee for managing your mutual fund portfolio. AMCs of all top performing mutual funds have a standard rate card.
- Risk – All mutual funds carry some amount of risk related to the stock market and the economy. All fund performances have benchmark indexes such as Nifty, BSE Sensex, and BSE 200. You can always compare different benchmarks of different funds.
How Often do you Need to Evaluate?
It is not necessary to monitor the performance of your fund investment on a daily basis. Depending on the tenure of your fund, you should evaluate the fund’s performance every six months. You can always take the help of a fund manager or fund house. They have adequate knowledge of the top performing mutual funds in India.
Why you Need to Evaluate?
The primary reason for you to evaluate a fund’s performance is so that you can make appropriate decisions which can result in higher returns. Regular evaluation helps in understanding asset allocation of a mutual fund. From 50:50 equity to debt ratio, the allocation can change to 60:40, in case there is a change in market volatility. In case there has been a change in the fund manager, you will be required to review and rebalance your entire portfolio.
Fund Fact Sheet
A fund fact sheet is a sheet maintained by an AMC and has all the information regarding the performance of your entire portfolio. This will help you understand where your fund stands and the financial ratios associated with the same. Fund evaluation also helps you to compare the performance of your mutual fund against other similar funds or funds from different categories.
Fund Alpha
This showcases the performance of the fund manager’s skills, strategy and past performance. Ensure that your fund’s alpha is always higher than the expense ratio of the fund.
Expense Ratio
Expense ratio is the fee which is charged by the AMC for the management of the mutual fund on your behalf. An expense ratio highlights the value-for-money aspect of a fund. Expense ratio can include management charges and all additional costs related to fund management. This highly impacts your take-home returns when you sell a mutual fund.
Benchmark
A benchmark is an indicator of a fund’s performance. All top performing mutual funds have got standard benchmarks. If a fund outperforms its benchmark, it means that the fund is performing well.
Portfolio
Always keep an eye on the quality of stocks which make up your mutual fund. Every mutual fund is required to hold good quality stocks which must have a lower price to earnings-per-share ratio (p/e) vis-a-vis price to book value (p/b) ration. You as an investor must ensure that your mutual fund is investing as per its objective.
Sharpe Ratio
A sharpe ratio shows the extra returns which you might receive as a result of the additional risks you undertake. Higher risks call for higher returns. The sharpe ratio tells you the exact amount of returns that you are liable to receive.