How To Check If A Mutual Fund Scheme Is A Consistent Performer Or Not - Outside View by PersonalFN

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How To Check If A Mutual Fund Scheme Is A Consistent Performer Or Not
Jun 19, 2019

When mutual fund schemes start generating low or negative returns, it creates a situation of panic among investors. Such situations cause confusion about continuing with the scheme or redeeming it.

If you have selected the right fund, you will be saved from the worry of constantly tracking the performance of your mutual fund scheme. But choosing the right fund is not easy as there are around 42 mutual fund houses in India and each house offers a plethora of schemes. As a result, it becomes difficult for an investor to choose the right scheme.

When we say, 'right fund', we mean a fund that is suitable for your needs and one that has proven to be a consistent performer.

Checking the consistency is an important step to select winning funds that will help you achieve your goals. If you analyse mutual fund schemes, you will find that among the thousands of schemes available only a handful have been consistent performers.

[Read: Why Some Mutual Funds Do Not Generate Consistent Returns]

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Consistency should be checked across longer time frames and not just for shorter ones. A fund may be a top performer when compared to shorter time frames like 6-month, 1-year, and 3-year period, but it may have not performed well in longer time frames such as 5-year and 10-year period.

You can check the consistency of the funds' performance by evaluating it on quantitative and qualitative parameters which are as follows:

Quantitative parameters

  1. Historical performance

    Checking the historical data of a scheme will help you track its performance across different periods and market conditions. For this purpose, rolling returns for 1-year, 3-year, and 5-year time durations can be analysed. A fund may have a decent 3-year return, but rolling return will help you determine how consistent the scheme's performance in each of those years was.

    To track the performance of the scheme over a period of three years, risk-reward ratios like Sharpe ratio, Sortino ratio, and Standard deviation should also be analysed. Assessing the ratios will enable you to find out if investors are being rewarded for the risks they undertake.

  2. Performance vis-a-vis benchmark/peers

    Consistency of the scheme can be determined by comparing the fund's performance relative to its benchmark and peers. Do note that markets are prone to volatility and no scheme can outperform its benchmark every time. However, comparing the scheme's performance with the benchmark and its peers will help you determine how the scheme is managing its portfolio.

    If the scheme's returns fall lower than the returns of benchmark/peers during a market crash, and if the scheme generates a higher return than benchmark/ peers during a bull run in most of the market phases, it can be termed as a consistent performer.

[Read: Why Do Certain Mutual Fund Schemes Underperform?]

Qualitative parameters

  1. Portfolio quality

    The holdings of the scheme should not be concentrated on a particular stock, sector, etc. so that investors get the benefit of diversification. Ideally, the top ten holdings in the scheme should not form more than 50% of the total assets.

    In case of debt funds, the manager must take care to have high quality debt papers in the portfolio, while the exposure to low-rated debt instruments should be lower to reduce the credit risk.

    The fund should also have low churn ratio as excess churning increases the overall expense of the scheme and impact the returns. The portfolio turnover ratio and expense ratio can be analysed to find out if the scheme has high churning rate.

  2. Quality of fund manager/house

    The quality of the fund manager and the fund house is an important criterion to track as they are directly responsible for performance of the scheme.

    It is important that the fund manager is not overburdened with schemes and manages not more than five schemes at a time. If the manager is responsible for too many schemes at a time, it may become unmanageable for him/her and the performance of the scheme is likely to suffer. Also, the manager should have a decent experience in investment research and fund management.

    Choose an efficient fund house that performs well across schemes. Invest in mutual fund houses which follow robust investment processes and have adequate risk management systems in place.

[Read: Why Qualitative Aspects Are So Important To Pick Mutual Funds]

Consistency of the scheme's performance is the criterion to check when selecting a fund for investment and while reviewing the performance of the funds in your portfolio. This is because the fund that may have performed well in the past may no longer be performing well currently.

While checking the consistency of the scheme's performance, make sure that adequate weightage is given to all the parameters mentioned above and not just the quantitative ones. The fund does not need to be a top performer or high-star rated to be able to generate consistent returns.

As an investor, you may not have enough time and/or knowledge to evaluate the schemes on all the above-mentioned parameters. Therefore, it would be best to consult an investment adviser who will be able to select the right fund for your financial goals and needs.

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Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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