In recent years, investing in mutual funds has gained popularity, as reported in an April 2021 article by Livemint, a financial daily. Returns are the primary goal for every investment, however, taking investment decisions entirely on the basis of returns is not a good strategy.
Investments in mutual funds include equity, debt, and balanced funds. All these are put into a portfolio to balance the risk associated with each one of them. This, in turn, impacts mutual fund returns.
A successful investor understands that a mutual fund’s performance is driven by many factors besides the return on the MF investment.
How to evaluate mutual fund performance?
Patience is one of the key qualities every investor must possess before investing. Even the most knowledgeable investor cannot predict market movements. In other words, your expectations will always differ from your actual returns. It is, therefore, necessary to consider certain other factors when evaluating your investment choices.
The following are some factors you as an investor should consider to evaluate mutual fund performance before deciding to switch:
- Do you own large-cap funds in your portfolio? This means that you are investing in companies that are in the top 100. These companies offer stable returns and are less risky as compared to mid or small-sized companies. Investing in these funds provides stability and security when market conditions are low.
- It is widely known that equity funds provide the best returns. However, they also carry higher risks. Due to this, many investors choose to invest in balanced funds to mitigate the risk. They also can invest in both equity and debt at the same time. By doing so, they can counteract market volatility.
- There is no doubt that life can be unpredictable. Saving for a rainy day is always a good idea, no matter how much we earn. Investing in debt funds could be a better way to accomplish this. Although they may provide low returns, they can provide you with liquidity in an emergency. Your short-term and medium-term financial goals can be met with these. As soon as you reach these goals, you can switch some investments to equity funds. Yet, it is always advisable to invest a small portion in safe funds.
- Lastly, stock markets are volatile. An investment fund may perform well one day and not the next. Therefore, mutual fund returns always come with risks. An investment fund with high returns will also have high risks associated with it. If the fund fails to perform, you could lose a lot more.
Many people invest in stocks and mutual funds due to the returns they generate. Nonetheless, investors who align their financial goals with risk and return are more likely to succeed in the long run. When in doubt about which mutual funds to choose, you can always consult a financial advisor. While investing, it is always better to be safe than sorry.