5 Questions to Ask When Evaluating A Fund

Published On: 04-Jul-2017

A mutual fund investment portfolio may comprise several mutual fund schemes, which may be linked to different financial goals and may carry different investment objectives. Since selecting the mutual fund schemes to form the basis of the future investment performance, selecting the schemes becomes an important decision to lay a strong foundation towards a prosperous financial future. Also, it becomes imperative for the investor to make an informed decision after reviewing various relevant data points. Here are five questions an investor may ask when evaluating a fund:

  1. How has the fund performed against the benchmark
    SEBI has made it mandatory for a fund to declare the benchmark index and disclose the fund performance against the performance of such benchmark index as well. One may like to review the fund performance and notice the alpha generated by the scheme against the benchmark returns. One should always aim to select the mutual fund schemes generating positive alpha. While historical returns may not guarantee future returns, such performance can vouch for such a scheme's investment strategy. One can check the fund performance and the benchmark performance in the monthly fund fact sheets uploaded by the fund houses on their website.
  2. How has the fund performed under the current fund manager
    Since the fund manager is primarily responsible for making all the investment decisions, it is always helpful to check the historical performance record of the fund manager managing the scheme. Further, the investors may like to review the continuity of the fund manager in the current scheme. This becomes relevant since, in case of any recent change for the fund manager, the historical performance becomes irrelevant, as the earlier fund manager had earned such performance. IF the fund manager is new, it may make more sense to check the performance of the other mutual fund schemes managed by him/ her to sense the efficacy of the investment decisions taken by the fund manager through the cycles. The monthly fund fact sheets provide all the relevant information about the fund managers managing different schemes, including the different schemes managed by the fund manager, the time for which the fund manager is with the scheme, etc.
  3. What is the fund's risk profile
    Instead of evaluating the fund solely on the absolute numbers, it is always good to review considering the risk-adjusted returns of the fund. If two funds generate similar returns, one should always prefer a fund with a lower standard deviation, denoting lower portfolio volatility. Sharpe ratio can be helpful for the investors in gauging the risk-adjusted returns for the scheme, as it helps to calculate additional returns earned by the fund by taking an additional unit of risk. The fund houses generally disclose the Sharpe ratio in their monthly fund fact sheets.  
  4. Where is the Fund Portfolio Concentrated
    Be it an equity scheme or a debt fund, the portfolio concentration is always helpful for the investors to get a sense of the investment strategy. The concentration is to be seen in the context of a single issuer or group companies and the sectors, industries, etc. One can check the monthly/ fortnightly portfolio disclosures by the mutual fund to review the portfolio curated by different mutual fund schemes. It is particularly important for debt schemes, wherein a single default by an issuer entity with a high concentration in the fund portfolio may wipe all the existing gains out of investment besides the possibility of negative returns.
  5. Does it align with my risk appetite
    When selecting a mutual fund scheme, it becomes important for the investors to select such mutual fund schemes, which best fit the risk appetite and investment strategy for the investors. For example, an investor may wish to hold a conservative portfolio, wherein the majority of the investments may be made in debt funds or conservative hybrid funds, etc. Similarly, an aggressive investor with a longer investment horizon may like to invest more into equity schemes. When the investment portfolio's risk profile matches with that of the investor, it is more likely to result in a better investment experience for the investor.