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3 Easy Steps for Analyzing A Mutual Fund

Moneymindz.com presents 3 Easy Steps for Analyzing A Mutual Fund

Step 1 :

Find out whether the scheme matches one’s investment objective. It is important that the scheme’s philosophy matches your investment philosophy. For instance, if your investment style is conservative, the fund manager’s investment approach should be conservative or vice versa. Or, if you prefer to invest in growth stocks, your ideal choice would be investing in equity growth funds.

Step 2 :

After identifying a fund compare the same with its peers or relevant benchmark. For example if your equity fund (index) has given a return of 20% find out how much Sensex has given in the same period. Also compare this fund’s performance with other similar equity funds investing in similar companies.

It is very important to find out the right category of the fund. For example if the fund invests only in mid caps, its right benchmark will be BSE Mid Caps and right peers will be funds that also invest only in mid caps and NOT those which invest in large caps or small caps.

Step 3 :

Moreover, analyze the performance of fund over a longer period of time i.e. how much return the fund gave in the last 5-yr, 1-yr and 3-months. Simply do not go by its performance in the last 1 month or the last 3 months. Prepare a small table (given below) to analyze the historical returns. These data are publicly available and does not require much effort to collect.

Fund Name 5-Year Return 1-Year Return 3-Months Return 1-Month Return Average Return
Fund 1 32% 29% 26% 45% 30%
Fund 2 8% 11% 4% 100% 7%

This table will help you find out whether “high and good” returns from the funds are one-time event or a consistent event. You can also compare your fund with its peers and find out other better options. A consistent return is a MUST before you invest in the fund. DO NOT invest in a fund (e.g. Fund 2) that just gave a very high return last month but have no history of good performance or a fund where everybody including your family and friends are investing. In the above example Fund 1 is better than Fund 2 because it has consistently given high return for the last 5 years. However, Fund 2 has delivered very high return only in the last 1 month. Thus, you as an investor must invest in Fund 1. Follow these small three steps to identify the best mutual funds to grow your wealth.

Mutual Funds
Mutual Funds