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How to Evaluate Mutual Fund Performance

Mutual funds are a good way for new investors to interact with the stock market. However, investors take an “invest and forget” stance with mutual funds.

This relaxed attitude is afforded due to the presence of a fund manager. The fund manager ends up turning into a scapegoat for failed investments or poor performance of the fund. While the fund managers are not without fault (they are humans after all, and can make mistakes), they aren’t solely responsible for the funds. The human aspect of mutual funds consists of the investor themselves and therefore, requires involvement from the investors themselves.

While the investor has no control over the investments made by the fund, they do have control over their investment in the fund. Investors need to monitor the performance of the fund to make sure that their capital is being used in a way that is in line with their financial goals. If the fund operates in accordance with the investor’s goals, they may maintain or increase their investment in the fund. In case the fund does not perform as per the investor’s expectations, it can withdraw its capital to prevent or mitigate losses.

But to properly monitor a mutual fund, the investor needs to learn how to evaluate the performance of the fund they are invested in. This poses a difficult task for investors as they often do not consider the right aspects for this task or if they do choose the right metrics of measurement, they implement them incorrectly.

So in this article, you will find 5 ways to evaluate your mutual fund’s performance.

5 Ways to Evaluate Mutual Fund’s Performance

1. Set a Benchmark

When evaluating the monetary performance of a mutual fund, it is necessary to make sure that the funds are compared to the appropriate standards. Holding a fund in negative regard just because it shows a reducing return is an incorrect analysis. An appropriate yardstick for a fund’s returns is to measure it against an index it follows or other similar companies.

It might turn out that a fund with reduced returns might still be performing well and actually beating the index, industry, or company type it follows. The opposite might be true as well where a fund might show increasing returns, yet fails to keep up with its corresponding index, industry, or company type.

2. Know the Expenses

Mutual funds incur certain costs like operational, administrative, and more. These funds are run by asset management companies that hire fund managers that not only oversee the utilization of funds but provide other services along the lines of recommendations and more personalized services.

Naturally, these services come at a cost. Investors can always forego these services if they prefer to make their own investment decisions to save some money. Yet some fixed costs need to be incurred by the investors anyway. Some of these fixed costs are entry and exit loads, transaction charges, etc.

The sum of these expenses, in relation to the value of the fund’s AUM, is known as the fund’s expense ratio. A higher or lower expense ratio in comparison to other funds doesn’t necessarily mean either of the funds is better or worse. Investors need to ensure that whatever the expenses of a fund are, they are not too exorbitant in terms of the fund’s returns.

3. Appropriate Comparison

Another metric to evaluate a mutual fund is to compare it to its peers. A mutual fund’s peer/competitor would be a similarly managed/styled fund provided by a different AMC. A common mistake made by investors when considering this metric is that they compare funds from different AMCs that are created to serve different financial goals, work on varied investment styles or follow a different index. It’s like comparing apples and oranges.

As a result, investors will compare a small-cap mutual fund with a large-cap fund when the economy is in favor of the latter. As a result, the small-cap fund might seem like a poor performer when in reality it could be beating the small-cap index by a wide berth. Investors should seek relevant literature to ensure their fund’s type and compare it only with an appropriate peer.

4. Know the Fund Manager

Since mutual funds are overseen by fund managers, not only is it important for investors to learn about the details of the fund but about the people managing the funds themselves as well.

Investors should seek out the fund manager or managers’ historical performance with other funds or even other AMCs. Investors should also be aware of the time that the fund manager has spent directing the fund. If a fund has been successful for 9 out of 10 years with two managers; the second joining the fund in the 8th year, it would be unwise to credit the second manager for the fund’s success and use only this data as a judge of the second manager’s skills.

Investors should also learn about the managers’ investment style to make sure that the investor’s goals can be achieved by the manager’s technique.

5. Consistency Checks

While it is not advised to compare and evaluate a fund’s performance with itself as a sole measure of performance; investors are advised to look at a fund’s historical data to evaluate its performance during the various market and economic cycles.

On a Quest to learn

To properly evaluate the performance of mutual funds it is necessary that an investor learns the ins and outs of how mutual funds operate. This is the part where The Academy of Mutual Funds by Finology’s education platform Quest, comes into play. The course covers important details to help you on your mutual fund journey. From selecting the right fund for you and tax-saving to improving returns without needing an advisor (no advisor = fewer fees/charges).

To top this cake with a cherry, you get a certificate from the BSE institute on completion of the course.

So you get the knowledge needed to improve your understanding of mutual funds and a certificate to allow you to capitalize on this knowledge. What’s more? You get all this for not ₹4,999 but ₹2,499! That’s 50% off and the offer stays forever! So head on over and get Questing.


Mutual funds are a viable investment option for investors that require some guidance when engaging with the stock markets. These funds still expose the investor’s portfolio to instruments like shares and bonds. It allows investors to invest in indices as well.

As mentioned before, investors often mistake the guidance afforded by mutual funds for an auto-pilot investment plan and remove themselves from the investment process. This is an ill-advised move.

Hope this blog and Quest’s course help you take back control of your mutual fund investment journey.

Ajeet Sharma, the founder of Financegab and a well-known name in the field of financial blogging. Blogging since 2017, he has the expertise and excellent knowledge about personal finance. Financegab is all about personal finance which aims to create awareness among people about personal finance and help them to make smart, well-informed financial decisions.


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