Mutual funds have a tumultuous timeline and it may be hard to catch every shrink and swell. Mutual funds investment that have delivered substantial results may not work in the present. And since we need clear indicators of this trend, learning how to smartly analyse Mutual fund is a great skill to hone.While mutual fund recommendations will be spouted by your fund manager, you need to know and track where your money is going.
If you look at your fund statement and notice that one of your funds has seen a steep decline while the others are thriving, this is not an indication for you to remove it from your portfolio. Look at mutual fund types and categories first to understand if other funds in the category have performed similarly.
A smart investor participating in Mutual funds would definitely plan to hold it for at least three years or more. But the mistake some investors make is to assume that the funds will need to be checked only after 3years. So they get complacent and ignore the 1-year return. If the 1-year return for a mutual fund is incredibly higher compared to other funds in its category,it may be the time to raise a red flag. Abnormal strong performances can be a negative indicator. An isolated year of unusually high returns is unusual as strong performance is not sustainable. Another reason to turn away from high short-term performance is that this attracts more assets to the fund. Smaller amount of money is easier to manage than larger amounts. The fund that had a great year might not perform in the subsequent year. So to manage a large chunk of bad funds is not desirable.
Understand the Economic Cycle
Time periods are crucial tools to analyse which fund is best froma performance perspective. However, thinking that 1 bad year is an indication to remove the fund from the portfolio is not the smart way to go. Even the best fund managers, despite going with the best mutual fund recommendations, are expected to have at least one bad year.Therefore, judging the stock or the bond for one poor performing year may be overstepping too soon. Managers should be brave enough to take calculated risksso they can break their yardsticks.
Focus on 5 and 10 year milestones
Fund management trends and styles keep changing and so do the mutual fund recommendations. Therefore, judging a mutual fund’s performance over a period spanning different economic environments will tell you which funds truly withstand the test of time. A full economic cycle has both recessionary and growth periods and span over 5-7years. So while analysing mutual fund and hunting for mutual fund recommendations, you come across a fund whose 5-yearreturn ranks higher than most funds in its category, you may want to delve deeper into it.
Assign weightage to each fund and measure the performance
1-year, 3-year, 5-year and 10-year returns – these are the common time periods for which mutual fund performances are available to investors. If you were to assign weightage to the funds in the order of which you’d give more emphasis to, the 5-year investment would be the highest. This is followed by the 10-year, then 3-year and 1-year last.
For example: You assign 40% weight to the 5-yearperiod, 30% weight to the 10-year period, 20% to the 3-year period and 10% to the 1-year period. You can then multiply these percentage weights by subsequent returns for the given time periods, and average the totals. Once you do this,it’ll be easy for you to compare funds. Use one of the best mutual fund research sites and do your search based upon 5-year returns. You can then look at the other returns once you've found some funds with good potential. This weighting and search method assures that you will make the best mutual funds recommendations based on performance, supported by strong indications about future performance.
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