How to review Mutual Fund Portfolio in 5 Mins?

Date: 20th September 2024 | Read time: 2 Minutes

Mutual funds can be a phenomenal way to grow wealth over time. In fact, with so many mutual funds available, picking the right one has become an overwhelmingly challenging task. If you are short on time but still want to make sure your investment in mutual funds is on track, here is a quick guide to how you could review a mutual fund in just 5 minutes.

Step 1: Defining Your Investment Objectives

Before launching into specifics about a mutual fund, define your investment objectives. For what are you trying to save-retirement, a kid's education, or a down payment on a house? Your objectives will help you choose a mutual fund that is consistent with your time frame and risk tolerance.

Step 2: The Benchmarking Process

Benchmarking is an essential step in mutual fund evaluation. Always compare the returns of the fund with those of a relevant benchmark index-say, for example, the Nifty 50 for Indian equity funds or the S&P 500 for U.S. equity funds. This will help you understand whether the fund is working in tune with the expectations of the market.

Step 3: Comparing with Peers of the Same Category

Mutual funds can be categorized based on their investment focus-either equity, debt, or hybrid schemes. Within each category, compare the performance of a mutual fund with that of its peers. You will get an idea of how well the fund is performing compared to similar funds within the same category.

Step 4: Analysing the Fund's Risk-Adjusted Return

Look beyond nominal returns and assess risk-adjusted returns. Certain metrics, like the Sharpe ratio, Information ratio will help you gauge how much return you are getting for each unit of risk. A higher Sharpe ratio and Information ratio indicates better risk-adjusted returns.

[Also Read: Taxes On Mutual Funds]

Step 5: Analyzing the Risk Profile of the Fund

Assess its risk profile against your risk tolerance. It is measured by volatility in returns, represented by standard deviation and beta, which measures how sensitive the fund is to market fluctuations.

Step 6: Checking the Exit Load of the Fund

The exit load is the amount one needs to pay in case he redeems the mutual fund units before a specific period. It is very important to check the structure of the exit load of the fund so as to avoid an unforeseen deduction of money in case the need arises for accessing money earlier than expected.

It need not be very time-consuming to review a mutual fund. If these steps are followed, then in no time one should be able to evaluate whether the mutual fund rightly fits the bill for investment goals.

Add these quick checks to stay atop your investment in mutual funds and make informed decisions within minutes.