How can you evaluate a mutual fund's performance? (2024)

Key takeaways from this article

• Benchmark comparisons:

  Assessing a mutual fund against a benchmark is key. Benchmarks like the S&P 500 provide context for a fund's performance. It's not just about positive returns; it's how the fund stacks up to similar investments.

• Evaluate net returns:

  Dig into the real earnings by looking at net returns. Subtract management fees to understand true profitability. Past performance in various market conditions can give you insight into potential future gains and risks.

This summary is powered by AI and these experts

• Carolina Gonzalez Rojas Cómo tomar mejores decisiones…
• Ryan A. James Business Fellow, Finance major at Elon…

• Carolina Gonzalez Rojas Cómo tomar mejores decisiones financieras 🌟Guío a Personas, Familias y Empresas colombianas a ahorrar, invertir y proteger sus excedentes de dinero, heredar patrimonio de manera rentable, segura y minimizando impuestos

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  Comparto 3 tips para evaluar si los Fondos que te planteas son Ideales para invertir.1. Los rendimientos se miden por los cambios o variaciones del valor de cuota, que involucra una comisión de administración que debe descontarse para saber cuál es la rentabilidad neta. Puedes pedir los históricos y evaluar cómo se comporta en pérdidas. 2. Debes observar los gastos OPERATIVOS.Siempre debes saber lo que estás pagando, y encontrar esa información debe ser fácil.Revisa: Impuestos, Índice gastos operativos, Comisiones y Spreads2. Conoce: los instrumentos en que invierte, duración del componente de deuda, la región geográfica, el sector económico y el tipo de cambio porque aclarará la Prima de Riesgo a la que se expone el inversor.

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• Keshav Vyas Business Developer

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  1. Performance: Examine historical performance across different time frames. Compare it to relevant market benchmarks and similar funds, but remember that past performance doesn’t guarantee future results.2. Benchmark Comparison: Compare the fund’s returns to its benchmark. Consistent outperformance is positive.3. Expense Ratios: Lower fees (expense ratios) benefit investors. Compare these across funds.4. Portfolio Quality: Understand the fund’s investment strategy.5. Risk-Return Indicators: Assess risk (volatility) relative to peers and excess return compared to similar funds.6. Your Goals: Consider your investment horizon and objectives. 🌟

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  If you're investing in a mutual fund, especially a stock fund, it's likely that you plan to hold it for at least three years or more. However, this doesn't mean that short-term returns, say 1 year, are irrelevant. In fact, a 1-year return for a mutual fund that is incredibly higher compared to other funds in its category can be a warning sign.Yes, good performance can be a negative indicator. There are a few reasons for this: One reason is that an isolated year of exceptionally high returns is abnormal. Investing is a marathon, not a sprint; it should be boring, not exciting. Strong performance is not sustainable. Another reason to avoid short-term high performance is that it attracts more assets into the fund.

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  The passage offers sound advice, but from an economic perspective, understanding the fund's impact on market efficiency is crucial. Analyzing expense ratios and portfolio turnover can reveal if the fund actively manages to outperform the market (potentially justifying higher fees) or passively tracks a benchmark, offering lower costs but market-rate returns. This empowers investors to optimize their portfolio's position on the efficient frontier, maximizing returns for a given risk tolerance.

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• Saumya Bhure Senior Analyst @ Paperchase | US CPA △| Equity Research

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  The basis of evaluation depends on investor objectives,risk appetite,fund objective,category & Opportunity Cost.A simple 3 step method - 1)Investor Goals 2)Fund Performance 3)Comparison."More Equity,More Risk,More Returns/Expectations". Return Expectations are directly proportional to the equity component.The Investor should aim to earn higher than opportunity costs.NAV indicates Investment Value.Holding the fund for long gives the fund time to benefit from market correction.Compare with Benchmark- Alternate Investment Opportunity , Market Risk,Industry Avg. using Standard Deviation, Sharpe Ratio etc.Fund returns < Benchmark consider other opportunities for max. profit subject to risk profile & factors, penalties/ fees or any T&C laid down.

  See Also

  How to Analyze Mutual Fund PerformanceWhat Is the Average Mutual Fund Return?How to analyze Mutual Fund PerformanceHow to Select the Right Mutual Funds for Your Portfolio

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• Ryan A. James Business Fellow, Finance major at Elon University | AmplifyME | Sick Economics

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  Comparing a fund's returns to a benchmark is a great way to determine its relative performance. Great benchmarks include (but are not limited to) the S&P 500 and similar mutual funds/ETFs in the same sector or industry. Even if the mutual fund has positive performance, it is not doing particularly well if it is losing relative to these benchmarks.

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  Economists should also consider the fund's alpha factor when comparing returns. Alpha measures excess return relative to a benchmark after adjusting for systematic risk (beta). A positive alpha indicates that the fund manager's decisions actively generate outperformance above the risk-adjusted market expectation. A focus on consistent alpha generation, rather than pure returns which can be influenced by temporary market swings, reveals true economic value-add by skilled investment managers.

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  When comparing a mutual fund's returns, it is important to analyze various performance metrics over different time periods to get a comprehensive view of how the fund has performed. Key metrics to consider include the fund's average annual return, total return, and risk-adjusted return compared to relevant benchmarks and peer funds in the same category. Additionally, evaluating the fund's performance against different market conditions and economic cycles can provide insight into its ability to generate consistent returns and manage risk effectively.

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  Considérez le bêta du fonds, qui mesure sa sensibilité aux mouvements du marché global ou de l'indice de référence. Un bêta supérieur à un indique une volatilité plus élevée que le marché, tandis qu'un bêta inférieur signifie moins de volatilité. Cette information est vitale pour vous aligner avec votre tolérance au risque et vos objectifs d'investissem*nt, permettant une allocation d'actifs plus informée et stratégique.

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  Beyond standard risk metrics, economists should consider the fund's potential exposure to tail risk. This refers to the probability of extreme losses beyond standard deviation projections. Focus on stress testing scenarios, like sudden interest rate hikes or geopolitical crises, to understand the fund's potential drawdown during such events. This provides insights into the fund's resilience in adverse economic conditions, crucial for portfolio decisions during periods of heightened uncertainty.

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  When assessing a mutual fund's risk, investors should consider various factors such as the fund's historical volatility, standard deviation, beta, and Sharpe ratio to gauge its risk-adjusted returns. Examining the fund's portfolio composition, sector allocations, and investment strategy can help determine its level of risk exposure and potential for fluctuations in value. Additionally, reviewing the fund's historical performance during different market conditions and economic cycles can provide insights into how it may fare under various scenarios.

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  Economists should evaluate a fund's fees beyond direct costs and look for evidence of hidden transaction costs or agency conflicts. Analyze trading frequency and portfolio turnover to assess potential brokerage fees accrued with each transaction. Additionally, consider whether the fund's structure incentivizes short-term trading by managers, leading to higher transaction costs and misaligned incentives detrimental to long-term investor returns. These factors impact economic efficiency and true cost to investors.

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  When reviewing a mutual fund's fees and expenses, it is crucial to consider the various costs associated with investing in the fund to assess its overall impact on your returns. Key fees to evaluate include the expense ratio, which represents the annual fees charged by the fund as a percentage of assets under management. Additionally, investors should be aware of sales loads, both front-end and back-end, which can reduce the initial investment or upon redemption.

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  Analyser la gestion et la stratégie d'un fonds commun de placement est crucial pour comprendre son potentiel de rendement. Vous devez vous pencher de près sur le profil du gestionnaire du fonds. Interrogez-vous : Qui est cette personne? Quelles compétences et quelle expérience apporte-t-elle à la table? Les antécédents du gestionnaire sont-ils marqués par une réussite constante et quelles stratégies a-t-il employées pour naviguer dans différents climats de marché?

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  When analyzing a mutual fund's management and strategy, it is essential to assess the experience, expertise, and track record of the fund's portfolio manager or management team. Evaluate their investment philosophy, process, and approach to managing the fund, including their decision-making process, research capabilities, and risk management practices. Consider whether the manager has a consistent and disciplined investment strategy that aligns with the fund's objectives and investment style. Review the fund's historical performance under their tenure, including how they have navigated different market conditions and economic cycles.

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  From an economic perspective, scrutinize the fund's management for potential principal-agent problems. Investigate the fund's incentive structure: are managers compensated based on fund performance or simply asset growth? Misaligned compensation models can lead to excessive risk-taking or a focus on gathering assets instead of generating strong returns. Economists should also assess whether the manager's investment strategy demonstrates potential for informational advantages or superior market insights, offering possible outperformance and justifying a more active management approach.

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• Daniel Thedra, CSA® Personal Relationship Manager | Investment Enthusiast | Co-Founder @OtakCuanIndonesia

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  Actually if it is going with mutual funds, i do think you need to Analyze the fund's management and strategy for example the composition of the product, the duration, the risk, etc

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• Marius W. Idea Challenger | Result Driver | Transformation Leader

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  Most of the analysis on returns and risks is backward looking. So good judgement & analysis is needed to judge if similar risks and returns can be expected for the future. This is even more relevant for specialized funds that are focused on certain market trends, e.g technologies.

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  Your timeframe for when you would like to 'exit' the mutual fund (or any investment for that matter) is very important. Can be as easy as using a 'less or more than 5 years' timeframe. Just that answer alone would restrict a LOT of options you have and focus on one's that make sense for you. So go in there with a realistic depiction of when you'd like those funds back to you

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