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Evaluating of Mutual Fund Schemes

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Existing investors of mutual funds needs to constantly evaluate the performance of their schemes to determine if they are on the right track or not.

The evaluation should ideally be done once a year for sure. More frequently within the year if you can get time.

There are several ways of doing this.

  • Change in scheme composition*

For instance, we need to guage through changes in the portfolio of the mf scheme and determine why and for what reason the fund manager has invested or existed from an investment.

The monthly portfolio excel files that can be downloaded from the MF website can be of use to us.

The investment decisions should be in line with the stated objected of the scheme.

If you feel it is going out of way consistently, it is a red sign.

For instance, if a equity-oriented balanced scheme has a mandate that it should invest only to the extent of 70% in equties but consistently violates this percentage, it is a risk one.

So, basically, change in composition of the scheme, the asset classes balancing etc. need to be checked out.

  • Fund Expenses*

Fund expenses should not go out of bounds. Expenses will hurt the scheme returns on the long run.

Ideally, as the scheme size increases, the expenses should come down.

In fact, this is one of the reason for selecing a scheme which is of reasonable size.

For equity schemes, i will consider replacing a scheme whose fund expenses (Expense ratio) go beyond 1.5% (Direct Plan) unless there is a reason for that.

  • Benchmark*

Every scheme will have an underlying benchmark.

I am generally okay as long as the scheme performs better than the benchmark at all times.

Some situations like a change in fund manager, merger of AMC with other might give minor deviations.

However, it wil be a panick if the scheme performs below benchmark for an extended period of time.

  • Peer comparision*

If the scheme is consistently under performing to its peers, it might be a good time to make a switch to a better peer. However, to do this, we need to check the performance of the scheme with the peer scheme on various time frames before deciding to do the move.Existing investors of mutual funds needs to constantly evaluate the performance of their schemes to determine if they are on the right track or not.

The evaluation should ideally be done once a year for sure. More frequently within the year if you can get time.

There are several ways of doing this.

  • Change in scheme composition*

For instance, we need to guage through changes in the portfolio of the mf scheme and determine why and for what reason the fund manager has invested or existed from an investment.

The monthly portfolio excel files that can be downloaded from the MF website can be of use to us.

The investment decisions should be in line with the stated objected of the scheme.

If you feel it is going out of way consistently, it is a red sign.

For instance, if a equity-oriented balanced scheme has a mandate that it should invest only to the extent of 70% in equties but consistently violates this percentage, it is a risk one.

So, basically, change in composition of the scheme, the asset classes balancing etc. need to be checked out.

  • Fund Expenses*

Fund expenses should not go out of bounds. Expenses will hurt the scheme returns on the long run.

Ideally, as the scheme size increases, the expenses should come down.

In fact, this is one of the reason for selecing a scheme which is of reasonable size.

For equity schemes, i will consider replacing a scheme whose fund expenses (Expense ratio) go beyond 1.5% (Direct Plan) unless there is a reason for that.

  • Benchmark*

Every scheme will have an underlying benchmark.

I am generally okay as long as the scheme performs better than the benchmark at all times.

Some situations like a change in fund manager, merger of AMC with other might give minor deviations.

However, it wil be a panick if the scheme performs below benchmark for an extended period of time.

  • Peer comparision*

If the scheme is consistently under performing to its peers, it might be a good time to make a switch to a better peer. However, to do this, we need to check the performance of the scheme with the peer scheme on various time frames before deciding to do the move.

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