Finance Blog

4 Ways to Measure Mutual Fund Performance

Mutual funds are financial instruments that groups money from various investors to buy stocks, debentures, securities, bonds, according to the fund’s theme, to produce returns for these investors. It is managed by professionals with thorough knowledge of the financial instruments and therefore can judge its profitability better, of every debt or equity, given the market conditions. Like traditional fixed deposits, mutual funds are liquid and can be redeemed without any trouble whenever needed, straight away with the fund house or by the legal brokers.

Mutual funds control the risk factor by portfolio diversification, i.e., by including distinctive asset classes into the portfolio depending on the focus point. The highly volatile stocks in the portfolio can be equalized by including the stocks with good stability or debt instruments. A systematic investment plan (SIP) has proven to be a brilliant investment option for all those with little or no prior exposure to debt or equity investments; they are also the tax saver mutual fund as you can save tax via sip. Also, you can commence investing while being away from all the hassles like buying, speculating, and selling.

Best Ways to Measure Mutual Fund Performance

  1. Alpha

The financial ratio, called Alpha, reflects the returns produced by the fund beyond and above the returns generated by the standard index. The Alpha value of 0 will imply that mutual fund performance is just according to the benchmark. On the one hand, a negative value would denote the underperformance compared to the standard index, whereas a figure over 0 would suggest that fund has outperformed.

  1. Beta

Beta is a statistical measure calculated by regression analysis; it reflects the volatility of the portfolio compared to the market. It demonstrates the tendency of a portfolio’s return to vary as per the market movements. When the Beta value is 1, it indicates that the fund is as volatile as its standard. While a value over 1 implies that the fund is volatile, a lower value represents that the mutual fund responds lesser than its benchmark.

  1. Expense Ratio

The expense ratio is a ratio of the overall fund’s expenses to the assets and reflects the cost-per-unit of managing a fund. Deducted from the total earnings of the fund, earnings before it is given to the investors, the ratio is inversely proportional to Asset Under Management (AUM) of the fund. It is an important factor that should be considered while opting for a fund as the more the expense ratio, the less the return will be, and vice versa.

  1. Rolling Returns

Rolling returns are the average yearly returns for a predominant timeframe, with returns taken into account until the last day of the period. It reflects the absolute and relative performance of mutual funds at regular intervals. It’s sometimes a suitable measure than compounded annual growth rate (CAGR) as a CAGR reflects the mutual fund performance while calculating but not how it has performed during the whole period. Rolling returns can be more accurate and unbiased as they indicate the performance during the total duration.

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