Mutual Funds: How to Check if Your Investment is Delivering
While investing in mutual funds, your financial goal should be fixed. Such as why you are investing, for how long and how much return you expect.
If you are doing SIP then you should wait for at least one to two years only then you will know whether you are getting the right returns or not.
Business Desk, New Delhi. In the last few years, the trend of investing money in mutual funds through Systematic Investment Plan (SIP) has increased rapidly.
These include especially those rural people who did not trust mutual funds earlier. But, now they are also leaving the traditional investment mediums like bank fixed deposits (FD) and investing money in mutual funds.
Of course mutual funds have to give very good returns, especially if done over a long period of time. But, you should always keep checking whether you are giving the right returns or not. Let us know how you can do this work.
Any investment should be meant to give returns that exceed inflation. This means that if inflation is increasing at the rate of 7 percent every year, then the returns must be higher than this, otherwise your principal amount will be lost. But, returns of 7-8 percent are also available in FD and many government schemes.
1. Evaluate Past Performance
While past performance is not a guarantee of future results, it serves as a valuable indicator of a mutual fund's ability to generate returns. Analyze the fund's track record over different time horizons, such as one year, three years, and five years. Compare the fund's returns to its benchmark index, which represents the overall market performance for the fund's asset class. A fund that consistently outperforms its benchmark is considered to be performing well.
2. Consider Risk-Adjusted Returns
While high returns are attractive, it's crucial to consider the associated risk. Risk-adjusted returns provide a more comprehensive assessment of a fund's performance by accounting for the level of risk taken. Common risk-adjusted measures include Sharpe ratio, Sortino ratio, and Treynor ratio. Higher values of these ratios indicate better risk-adjusted performance.
3. Analyze Expense Ratio
The expense ratio is the annual fee charged by the mutual fund company to manage the fund. This fee reduces the overall returns for investors. Lower expense ratios are generally preferable, as they allow more of your investment to work towards generating returns.
4. Understand Fund Management
The expertise and experience of the fund manager play a significant role in a fund's performance. Research the fund manager's track record, investment philosophy, and tenure with the fund company. A seasoned and successful fund manager is more likely to steer the fund towards achieving its investment objectives.
5. Assess Fund Volatility
Volatility measures the degree to which a fund's value fluctuates over time. Higher volatility indicates greater risk, as the fund's price may experience significant swings. Evaluate your risk tolerance and align your investment choices with your ability to withstand market fluctuations.
6. Consider Fund's Investment Objectives
Ensure that the fund's investment objectives align with your financial goals and risk tolerance. A fund's investment objectives outline the asset classes it invests in and the risk profile it aims to achieve. Choose funds that complement your overall investment strategy and align with your long-term financial aspirations.
7. Seek Professional Advice
If you find it overwhelming to navigate the complexities of mutual fund evaluation, consider consulting a financial advisor. A qualified advisor can provide personalized guidance based on your specific financial situation, risk tolerance, and investment goals
Remember, investing in mutual funds involves inherent risks, and past performance is not a guarantee of future results. Carefully evaluate your investment choices, consider seeking professional advice, and make informed decisions that align with your financial goals and risk tolerance.
