Mutual fund investments, along with fixed deposits and direct equity, are among the three most common forms of investments. People with a little bit of risk appetite usually prefer investing in mutual funds.
Unlike with fixed deposits, where most people put all their eggs in one basket (a huge chunk of money in order to draw higher incomes from the interest), or equity stocks (which run a higher risk and can be slightly unpredictable by nature) mutual funds can be termed as one of the safest, low-risk forms of investments in which investors can park their monies in several different funds of small amounts.
But it is also important to review mutual funds, both before investing and also, periodically after. Let us find out how.
The Nature of Mutual Fund Investments
Most people who invest in mutual funds understand that in order to grow their wealth, they must put away the monies for a long term. That is not to say that one should forget about the investment and wake up only when the fund is due for maturity. It is absolutely essential for investors to periodically review mutual funds and the performance of the schemes.
This is done by researching and reading up about the historical returns of the scheme in question and comparing with the returns of the category/benchmark to which that scheme belongs, done over the same period of time. Reviewing the mutual fund is important as if you neglect to do so; you run the risk of not achieving your strategic, time-bound, planned goals. As such, you should review your mutual funds at an interval of every six to nine months in general.
4 Things you Should do to Review your Mutual Funds
Study the Performance of the Mutual Fund Scheme:
Over different periods of time e.g. six months, 1 – 3 years or even 5 years and above, the historical absolute returns of a particular mutual fund scheme can give you a decent idea of the nature and performance of the scheme in question. Instead of just comparing the point-to-point returns, investors must pay attention to the returns earned during the various, market cycles in order to review mutual funds in detail.
If you study the pattern and find out that the absolute returns are constantly below par or do not meet expectations, then that could definitely put the investors’ goals at risk and could even mean that the goals wouldn’t be met at all.
Compare the Performance of the Scheme:
After studying the scheme’s performance, investors must also compare it along with the benchmark and category in which the scheme belongs. When investors study the returns vis-à-vis its benchmark, they can understand if the fund has been able to generate enough premium that justifies the cost of the scheme versus simply tracking the benchmark via an exchange traded fund.
This comparison with category returns can help investors understand if the out performance (or under performance thereof) can be attributed to an entire category, to just the scheme or a little bit of both the things. In case the scheme has been under performing consistently, then it is in the best interest of the investor to bow out of it and switch to better performing schemes in the same category.
Also Read: 5 Sign you Should Invest in Mutual Fund
Access the Risk:
To review mutual funds, investors must also access what risks were undertaken in order to earn those returns. Risks can be accessed by using several measures such as Standard Deviation, Trey nor Ratios, Sharpe etc. Simple Deviation is the simplest of all the above mentioned measures of accessing risks. It is comprehensive and gives investors a decent idea of what risks are involved in earning expected returns. Investors can then compare the risks associated with the scheme along with the category average and check if it matches their expectations as well as their own risk profile.
Changes in Asset Allocation:
Investors must also consider any asset allocation changes at their level, which may have occurred after the original investment was done. This is another way to review mutual funds. Since all assets may not necessarily decline or grow at the same rate, the chances of this happening are high. Investors must ensure that their current asset allocations meet their originally intended allocation.
Investors, who’ve put their money in sectoral, thematic or specific segments of the market, should be extra careful, as they are also exposed to unsystematic risks. They must access the macro events related to the sector, such as regulatory changes in the economic conditions which can help them estimate projections of the theme or sector up to a certain degree.