The urge to make more money is universal. The best method for retail investors, of course, is a mutual fund. The benefits are many and it even enables and empowers you to get rich fast, if you want that, with a bit of risk, or gives you solid returns over a period of time by ensuring relative safety of your money. In India today, the mutual fund market is at booming stage, as many investors have opted for the route to avail good returns. Investment in mutual funds can give up to 1% to 26% return depending upon the tenure. The investment in mutual funds look even more exciting after market regulator Sebi revised the slabs for fees which mutual funds can charge customers for asset management. The regulator kept a massive permissible limit of 2.25% for equity schemes, while 2% for other schemes of the total assets under management (AUM).  The term ‘mutual’ fund means that all risks, rewards, gains or losses pertaining to, or arising from the investments made out of this savings pool are shared by all investors in proportion to their contributions.

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Archit Gupta, Founder & CEO ClearTax said, "The premise of investing in mutual funds lies in the prospects of accumulating high returns. These returns, however, are not guaranteed, and the past performance of a fund does not ensure the same outcome."

Gupta added, "While there is no way to guarantee the returns, as an investor you can avoid some  pitfalls by analyzing the fund's performance and making well-informed decisions. Simple steps like tracking your portfolio performance and understanding the parameters for evaluating the same will help you strategize better." 

Here's how you can derive whether your mutual funds is performing well or not, as per ClearTax. 

Compare the fund’s performance based on the investment horizon

The investment horizon is an important factor to take into account when analyzing the performance of a fund. When you choose to invest for a longer time horizon, you allow yourself to take more risk over the course of time, which means that the market too gets the time to recover. 

That is precisely why the rate of return earned by a long-term investment is higher than the one earned by a short-term investment. In the case of short-term investment, the investor does not enjoy the luxury of expecting liquid funds to yield double-digit returns.

Historicals indicate equities usually generate a return of around 12 percent but if your existing equity funds are not able to meet this return, it would be a good idea to change strategies.

Look for a higher Alpha

Alpha is indicative of the extra returns which a fund delivers over and above the benchmark. It reflects the efficiency of the fund manager’s strategies with regard to the performance of the funds. A fund is considered to be good if it can generate a higher alpha. In fact, Alpha is one of the most commonly considered indicators of investment performance.

For a better understanding of Alpha, assume your stock market investment delivers a 20 percent return while the benchmark achieved only a 15 percent returns. This would mean that for your fund the alpha is 5. 

On the other hand, if your fund earned 15 percent while the benchmark achieved 20 percent, the alpha for your fund will be -5  Ideally, you can expect the alpha to be more than the fund’s expense ratio.  Suppose your fund’s expense ratio is 1.5%, then the fund needs to produce an alpha of more than 1.5%. If it lags behind the said yardstick, then it may be time to look for better options. 

Alpha also serves as an important criterion for gauging the fund managers adeptness, therefore, their compensation.

Compare the performance with a target rate of return

Having individual financial targets is a requisite every investor must adhere to. Personal investment targets play a vital role in the assessment of the fund’s performance as they help determine if a certain fund is suited to you or not. As the market conditions change and when as an investor you shift to different life stages, your parameters for measuring the performance of your portfolio also changes.

Consider a fund which has been a top performer in its category and has outperformed the benchmark, delivering a return of 10% over a period of 7 years. 
However, your target rate of return is 12%. From this perspective, the fund has grossly underperformed your expectations and you may want to switch to a better fund with higher returns.

Compare funds based on rolling returns

The right metric is a crucial element for arriving at the right decision when measuring the performance of a fund. Consider a case where you along with your friend invest in the same equity fund. While your friend makes a one-time investment of Rs 10,000, you initiate a monthly SIP of Rs 10,000. As we know, the factsheet of a fund reflects annualized returns of the fund over a given time horizon. 

It is computed based on the beginning and end fund values and doesn’t take into account the intermediate values.

Annualized returns are a fair reflection of the performance of a one-time investment. However, to analyze the performance of a SIP you would require much more than just the annualized returns.

You may want to consider rolling returns which would accurately reflect how your fund value grew in the course of the time horizon.

Keep an eye on the expense ratio

An expense ratio is a fee every fund house charges its investors for managing their portfolio. It is charged on the fund’s assets under management and plays an important role in the quantum of returns that you may earn on the mutual fund investments.

Ideally, as the fund house expands and grows bigger in size, it should be able to reduce its expense ratio owing to economies of scale. But if your fund’s expense ratio is increasing continuously then you must check as to why. It could be the result of high levels of trading activities going on to take advantage of the market conditions. 

However, if the increase in expenses is not compensated by a corresponding increase in returns then you can take it as a cue to be alarmed. This could also mean that the fund manager might be engaging in trading activities frequently to correct his bets which may have gone wrong. In case this situation persists, it may serve you better to find an alternative instead of sticking to the same fund.