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Mutual Fund Performance Analysis- How to Select Best Mutual Funds for Higher Returns

Mutual fund investments are one of the best ways to increase income and earn more with your money. Many people opt to invest in them than keeping their money in a savings account as a way to increase their wealth. A mutual fund allows investors to receive higher profits. Read further to know how to select the best mutual fund for higher returns.

Factors of Mutual Fund Performance Analysis

There are many factors the investors take into account before investing in mutual funds. The most common ones are returns, risks, and rating of mutual funds. However, investors should also determine what their goals are, how the funds have performed compared to a market benchmark, its monthly profits, etc.

    Here are some factors that you need to look into while you determine the mutual fund performance analysis-

  • Understand the Fund’s History

    An important factor that plays a significant role in mutual fund analysis is its history. It is easy for a fund to generate returns when the market is high. However, it is essential to understand how it had performed when the market was down. Get to know how the mutual funds have performed over the past decade. Understand how the fund has coped with the risk of a bad market. Researching mutual funds history can impact your returns.

  • Find its Monthly Performance

    Mutual funds’ performance is the first factor that an investor looks into. It is difficult to determine how a fund has performed over a year or two when you compare it to a benchmark. Finding how the fund performed every month is more important. What you can do is compare its monthly performance to a benchmark. That way, you will get to know which month the fund performed better and in which month it went down. It becomes easy for you to understand its pattern of over performance and under-performance.

  • Understand the Fund Expense Ratio

    When you invest in a fund with a mutual funds company, you will have to pay for their services. Expense ratio is the cost charged by the company to manage your investment. However, a company can’t charge more than 2.5% of the fund’s Asset Under Management (AUM) as per the Securities and Exchange Board of India (SEBI) rules. The profits will decrease when the expense ratio goes higher as you have to pay it on your returns. Invest in a fund that has a low expense ratio, or you will be spending more on your profits.

    There is one other thing that you can do to reduce the expense ratio. You can invest in a direct plan. Direct plans have a low expense ratio compared to a regular plan. You can save up on commissions with direct plans of mutual funds and increase your profits.

  • Fund performance in Up and Down Market

    Understanding the fund’s performance in up and down market is important too. Determining the performance in both situations can be of value as you might find which fund will give stability and higher returns. The funds that many investors look after deliver higher up-market capture ratio and lower down-market capture ratio.

    For instance, the benchmark index is 100, and a fund with a down-market ratio of 60 shows that it has declined only 60% compared to the index. While a fund with an up-market ratio of 115 indicates that it has outperformed the benchmark index by 15%.

  • Understand a Fund’s Risk-Adjusted Returns

    Many investors look into yearly returns of mutual funds before investing. However, it is more critical to understand risk-adjusted returns. You need to know the standard deviation and Sharpe ratio of the mutual funds to find which might give you higher profits for the additional risk you take.

    For instance, you are comparing two mutual funds before purchasing. One of them has a Sharpe ratio of 0.45, and another has 0.55. The standard deviation of the first one is 11% and the second one is 16%. You should purchase the second mutual funds as the risk is adjusted with the higher returns.

    However, there are some other factors too that you need to keep in minds such as your investment deciding your investment goals, knowing if you want to invest for a short time or a long time. Along with that, you also need to keep an eye on the economy as it impacts the market. Remember you will have to pay the exit load if you withdraw from your mutual funds before its maturity.