how you can evaluate performance of a portfolio of mutual fund
Answer / kwaku agyeman
For an individual investor, sometimes it is difficult to
judge which mutual fund is good and which one is not. The
parameters for evaluation differ depending on the fund type.
There are different parameters for an equity fund and
different ones for a debt fund.
In case of equity funds: Performance In case of an equity
fund, you can begin by looking at its performance as
measured in absolute returns from the fund. The Securities
and Exchange Board of India (SEBI) has standardized returns
declarations on the fact sheet.
A declaration is on a compounded annualized basis for a
period of more than a year and on absolute basis for less
than a year.
Returns against benchmark: You should look at an equity
fund's returns for various periods vis-a-vis its benchmarks.
The benchmarks may be varied - the interest rates, Sensex
level, or some other index. The performance should be seen
over a long term - say two to three years. You should
compare the latest NAV with the unit value during the time
of purchase. Absolute returns are the first yardsticks an
investor should look at.
Portfolio of fund: You should also examine the portfolio of
the fund to gauge its quality of investments. Ultimately, it
is the portfolio that will yield the returns. A portfolio
should be in line with the mandate of the fund. For example,
a Pharma fund should have Pharma stocks and a gilt fund
should have investments in gilt securities.
In case of a diversified equity fund, you should check
whether the fund is adequately diversified across sectors
and companies rather than limiting its investment sphere to
a narrow gauge. Funds are supposed to give sector-wise
break-up along with details of company holdings.
Portfolio turnover ratio: Another tool to evaluate a fund is
the portfolio turnover ratio. This gives an understanding of
the extent of portfolio movements. A ratio of 100 per cent
indicates that the fund changes its complete portfolio each
year. A ratio of 50 per cent indicates that the fund changes
its complete portfolio every two years. Frequent churning
increases the risk profile of the fund. Also, it means the
fund is incurring additional transaction costs.
In case of a debt fund: In case of a debt fund, apart from
the two parameters of absolute returns and portfolio
turnover ratios, you should also look at the ratings
break-up for the fund's corporate bond holdings. This
indicates the quality of the portfolio. Investing in company
bonds has an element of risk. You should check the ratings
of the bonds in which the fund has invested. The credit
rating gives a good indication of the security profile of
Portfolio maturity: In addition, you should also look at the
portfolio maturity. This is the average tenure of the bond
portfolio of the debt fund. It indicates the susceptibility
of the fund to changes in interest rates. Bond prices and
interest rates move in opposite directions. As such, any
rise in interest rates may lead to a fall in bond prices and
hence the NAV of the debt funds, and vice versa. If the fund
expects interest rates to fall, it might increase the
maturity of the debt portfolio to gain from a probable rise
in bond prices.
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