Evaluating the performance of mutual fund (MF) schemes can be a daunting task. Because the net asset value (NAV) or price of one unit of the scheme only tells part of the story as getting the return from the scheme often doesn’t make much sense. According to investment experts, even those who claim to track the performance regularly mostly get the evaluation wrong. Only a few savvy investors have figured out where to source it from—something that may seem so simple yet can be quite a task.
“Most investors look at their acquisition cost and historical return offered by the scheme. Many often go by what the MF distributors claim as returns,’’ says Amit Trivedi, a financial trainer, who runs Karmayog Knowledge Academy. “Only savvy investors go by rankings given by popular websites like valueresearch or other publications. Mostly people are interested in historical returns,’’ he adds.
That is sad news, as an investor must have a clear picture of the scheme he or she wishes to invest or sell. A wrong evaluation could lead to wrong decisions. That, simply put, means loss of money or opportunity to make money. An investment consultant says: “Recently I got a call from a client. She wanted to invest in a particular scheme. When asked why she wanted to do so, she said she saw that it had given huge returns in the last one month.’’
The consultant then checked the scheme’s performance and found that it was a perpetual laggard that had performed only in the last month—something that needed investigation. Worse, there were other schemes in the same category with consistent and superior performance. Not convinced about the sustainability of superior performance in the long run, the expert advised his client against the scheme. “This is what happens when you don’t have a complete picture,’’ he says.
But, how does one “correctly’’ evaluate the performance? According to Trivedi, if one is considering investing in a scheme, even before analysing the performance one has to 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.’’
The next trap to avoid would be committing the mistake of comparing the scheme with wrong schemes or benchmarks. This may sound a silly mistake to make, though it is not. “One of the most common mistake investors commit is to merely look at the returns offered by the scheme. If you don’t look at the performance in the context of the relevant benchmark or peers, the figure doesn’t mean anything,’’ says an MF manager. “Another routing mistake is to look at the performance of schemes in the wrong category. Sometimes people even look at wrong benchmarks to draw wrong conclusions,’’ he adds.
Here is an example of how the comedy for errors takes place. Lets say the midcap category has been performing well in the recent past. If one were to compare a largecap scheme with one in the midcap category, the investor would wrongly assume that the largecap hasn’t performed well. However, this is not the case. It is just that midcaps have outperformed largecaps for a brief period of time. It would also be a mistake to compare the performance of a largecap scheme with the midcap index for the same reason.
“Most investors look at their acquisition cost and historical return offered by the scheme. Many often go by what the MF distributors claim as returns,’’ says Amit Trivedi, a financial trainer, who runs Karmayog Knowledge Academy. “Only savvy investors go by rankings given by popular websites like valueresearch or other publications. Mostly people are interested in historical returns,’’ he adds.
That is sad news, as an investor must have a clear picture of the scheme he or she wishes to invest or sell. A wrong evaluation could lead to wrong decisions. That, simply put, means loss of money or opportunity to make money. An investment consultant says: “Recently I got a call from a client. She wanted to invest in a particular scheme. When asked why she wanted to do so, she said she saw that it had given huge returns in the last one month.’’
The consultant then checked the scheme’s performance and found that it was a perpetual laggard that had performed only in the last month—something that needed investigation. Worse, there were other schemes in the same category with consistent and superior performance. Not convinced about the sustainability of superior performance in the long run, the expert advised his client against the scheme. “This is what happens when you don’t have a complete picture,’’ he says.
But, how does one “correctly’’ evaluate the performance? According to Trivedi, if one is considering investing in a scheme, even before analysing the performance one has to 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.’’
The next trap to avoid would be committing the mistake of comparing the scheme with wrong schemes or benchmarks. This may sound a silly mistake to make, though it is not. “One of the most common mistake investors commit is to merely look at the returns offered by the scheme. If you don’t look at the performance in the context of the relevant benchmark or peers, the figure doesn’t mean anything,’’ says an MF manager. “Another routing mistake is to look at the performance of schemes in the wrong category. Sometimes people even look at wrong benchmarks to draw wrong conclusions,’’ he adds.
Here is an example of how the comedy for errors takes place. Lets say the midcap category has been performing well in the recent past. If one were to compare a largecap scheme with one in the midcap category, the investor would wrongly assume that the largecap hasn’t performed well. However, this is not the case. It is just that midcaps have outperformed largecaps for a brief period of time. It would also be a mistake to compare the performance of a largecap scheme with the midcap index for the same reason.
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