Analysing Mutual Fund Performance: A Step-by-Step Guide

The most alluring investment plans that have attracted most investors and are used mainly as a vehicle for diversification of their respective portfolios and benefiting from professional administration of their asset base is in mutual funds. Still, mere investment in mutual funds is not enough; this means that some analysis has to be done on whether more should be invested, reduced, or withdrawn. In this guide, we will discuss the process of analyzing mutual fund performance, its purpose, advantages, limitations, and give a concrete example of how to evaluate a fund. Understanding Mutual Funds Before discussing how mutual fund performance is calculated, some background information on what mutual funds are needs to be given. It pools the monies of thousands of investors in order to fund investment in diversified stocks, bonds, or any other security type. It\'s professionally managed with a view of maximizing returns of the fund for one manager or group of managers. The performance of a mutual fund is the measure of the success of an investment over time; thus, its analysis becomes crucial to decide if your mutual fund is meeting your goals as an investment. Purpose of Analyzing Mutual Fund Performance With multifaceted purposes, the analysis of mutual fund performance leads to these kinds of evaluation for an investor, either to determine if the mutual fund is helping to meet that particular financial objective, be it growth income or capital preservation. Analyzing mutual funds will be there to evaluate its track record, in understanding its level of risk, and predicting a possible future course of performance. Major Objectives of Performance Analysis Measuring Returns: The investor must be aware of the historical performance of the fund. That is, the returns generated by the fund need to be compared against suitable benchmarks and peers so that the investor would be able to assess the relative performance of the fund. Risk assessment: Investors may take the tool of performance analysis to view the level of risk associated with the investment strategy of the particular fund. A fund which achieves the high returns may do so with a level of risk that others would not accept. Identification of consistency: Consistency over time is generally a better predictor of long-term viability than short-term periods of spectacular returns. A benchmark comparison takes care of whether the mutual fund\'s performance is better or worse in relation to a benchmark index, a peer group, or a group of indices if the characteristics for the portfolio measured are concerned. Benchmark comparison updates the investor whether to hold their existing investments or rebalance into a different one. Step-by-Step Guide to Mutual Fund Performance Analysis Mutual fund performance analysis is a process that involves several key metrics and data points. Below is a step-by-step guide to mutual fund performance analysis for any mutual fund: Step 1: Historical Returns Review The one ea