How to Measure the Performance of Equity Mutual Funds

Finding yourself the right equity mutual fund that fulfils the investment objective is like finding a needle in the haystack. There are so many different funds available in the market from different fund houses, that analysing all the details gets too difficult for you.

Nowadays, there are many platforms available online that helps you to select the right fund as per the goal, simplifying the process for you. But, it’s always better that you should do your own research to make sure, the chosen fund is the right one for you.

Following are the six indicators that will help you to analyse the performance of equity mutual funds.

Turnover Ratio (TR)

This ratio indicates how much percentage of a fund’s portfolio is changed within a given year. For example, a TR of 50% means, 50% of the fund’s portfolio is replaced in the given year. Actively managed funds like equity funds have higher TR compared to passively managed funds like index funds.

Total Expense Ratio (TER)

This ratio shows the cost of managing and operating the fund. It includes administrative & management expenses, advertising, commission to distributors etc. A TER of 1.5% means, 1.5% of the fund’s total asset is used to cover all the expenses.

You should know that if a fund has high TR, then it increases the TER of the fund, slashing the return percentage by a few basis points.

Standard Deviation (SD)

It measures the volatility in the fund. It is calculated by comparing the fund’s daily closing prices over a specific period relative to its average return over the same period.

More the daily return deviates from the average return, higher is the standard deviation. If a fund has an SD of 5% with an average return of 12%, then the return percentage will range from 7-17%.

Beta

Beta measures the volatility of the fund with respect to the benchmark index. The beta of 1 indicates the fund is perfectly aligned with the movement of the benchmark index. The beta of more than 1 indicates the fund’s value moves more than the index. Risk-averse investors prefer low Beta to reduce volatility.

Alpha

Alpha measures the fund’s return compared to a specific benchmark, adjusted for risk. Alpha less than zero indicates the fund is underperforming the benchmark and has earned little given the risk assumed.

Sharpe Ratio

Its one of the most important indicator that helps you to decide on the fund’s selection.

Sharpe Ratio measures the risk-adjusted returns of the fund. Further simplifying, it examines the fund’s performance by adjusting for its risk.

It is calculated by taking the total returns of the fund, subtracting it by risk-free return and then dividing the result by SD. If Sharpe Ratio is 1.35%, then it indicates, the fund is generating 1.35% excess return p.a. for a per cent of annual volatility.

All the above-discussed indicators provide with you with quantitative measurement of the fund performance, but, in order to complete full performance analysis, you need to conduct the qualitative analysis.

Always invest in funds which are run by an experienced and disciplined portfolio manager. Checking the AMC performance and fund manager’s background is necessary, in order to ensure, in troubled times, if the fund will not underperform and provide market-crushing returns in favourable times.

Summary

Knowing to analyse the performance of equity mutual funds helps you in the long term and achieving your financial goal more efficiently. From the selection to the mid-term review of the fund’s performance, these indicators will help in meticulously analyse the fund’s performance and growth.

Moreover, if the fund is undertaken a change in investment objective or change of fund manager takes place, monitor the fund’s performance frequently and keep an eye on the portfolio changes.

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