A comprehensive analysis of mutual funds is daunting. With an immense variety of options on leading platforms like Zerodha and Paytm Money, choosing the correct one might seem as torturous & time-consuming as finding a needle in a haystack. But don’t be anxious; I have the exact procedure to dissect the mutual fund performance and present the complex ideas in the form of easy-to-understand information in front of you.

Understanding NAV: The Foundation of Mutual Fund Analysis

When I started, I thought that the “lower” Net Asset Value (NAV) was better. I was mistaken. I missed some good chances to invest because of this mistake. Learning this took me a while. Your fund’s price per unit is its NAV. We get NAV by dividing the difference between the market value of an investment and the liability from the cost of the investment to the total number of shares distributed. The real comparison should be how they’ve done until now. A ₹10 NAV is not always better than a ₹100 fund – what counts is how it was developed over time.

Here is the story of a real experience that I want to share. Last year, I was doing a comparison of two large-cap funds. Fund A’s NAV was ₹25, while the NAV of Fund B was ₹95. Many of my friends preferred Fund A just because it was “cheap.” However, after we analyzed the actual returns over five years, Fund B was the one that showed stable and strong growth despite its higher NAV. This is a very good lesson that I have learned from it: One can be low in price but good in performance since the price and the value are different things in the world of mutual funds.

The Art of Analyzing Returns

The nature of the returns can be understood only when one goes beyond the surface numbers. Keep in mind, you can see fund performance on Upstox, where different returns, for different periods, are shown. The various periods are like different chapters of a novel that reflect the performance of the fund.

• Short-term returns, which are usually for one year or even shorter, are quite similar to snapshots. They capture the current situation, albeit it is not the whole story. During the 2020 market crash, I noticed that many of the funds showed negative one-year returns, but only those investors who understood that these were temporary lows and used them as a buy. Such opportunities were successful.
• Medium-term returns that look at trends over three to five years are more reliable as they are less affected by particular market conditions. They are stable in different market conditions and economic cycles. They also tell you about the fund’s performance not only during bull times but also during bear markets. This is important when analyzing high-return mutual funds that could take on too much risk.
• Long-term returns, meaning seven to ten years, are the fund’s report card. They display the ability of the fund to last over time. Regardless of whether they are index funds or actively managed funds, the performance over the long term will give you a better idea if the fund manager’s strategy is well-anchored in the long run or if it was just one isolated lucky market period.

The Risk Factor: Beyond Returns

• Many investors are not good at risk analysis. People often get spellbound by the promise of high returns without realizing the risks that are taken to win them. Let me tell you an interesting story. A few years ago, I was carrying out an analysis to compare two mutual funds from the small-cap category. It appeared that both funds gave almost the same return, but I found something very interesting when I went through their risk metrics in detail.
• The first mutual fund had achieved its return rate with a risk of considerably less volatility than the second. Even though both funds had experienced a growth of 15% every year for five years, the first one travelled a much smoother road. In times of inevitable market crashes, the first fund’s loss was, as a rule, not as substantial as the second one.
• Standard deviation, which is a major risk measurement, tells you the amount of a fund’s returns changing from its average. Think of it as a fund’s mood swings. The fund that has a standard deviation of 15% is generally mild compared to the one with 25%. Generally, fixed-income mutual funds are the perfect option for conservative investors as they have lower standard deviations than equity funds.
• Very important is the Beta risk measure too which shows you the sensitivity of the fund to market movements. A fund with a beta of 1.2 will usually move 20% more than the market in both directions. As a person who regularly conducts analysis sessions on Alice Blue, I give special attention to beta in the event of high market volatility. 

Portfolio Analysis: Looking Under the Hood

Portfolios are like your favourite dishes. Knowing what is inside is key to making correct decisions. My analysis of mid-cap stock index funds shows how important this is.

In the last quarter, I looked at two funds on Zerodha. Both were mid-cap funds with similar rates, but their value differed. The 1st fund spread across 45 stocks, each less than 6%. Conversely, while 10 stocks inflated, the 2nd fund had concentrated 40% of its assets.
In calm markets both funds were good. However, the poorly diversified 2nd fund had been hit hard when the market got chaotic. This taught me how much risk can be reduced by diversifying a portfolio.

The Impact of Expenses on Your Returns

The expense ratio is an aspect of mutual fund analysis, which is often forgotten about. You can think of it as the cost of maintaining your investment. Although 1% may sound small from the expense ratio, it is a very big difference in the long run. Let me show you how it works in practical terms.

Suppose you put ₹10 lakhs into two different mutual fund investment plans. Both of them bring the investors a gross return in a size of 12% once a year, but Fund A costs 0.5% for the expense ratio, whereas Fund B charges 2%. After 20 years, Fund A, the one you invested in will rise approximately ₹88.5 lakhs, while the other one, Fund B, will get to ₹67.9 lakhs only. This is a difference of ₹20 lakhs – the seemingly small difference in expenses led to it all.

Understanding Fund Management Style

Fund management is the way a manager utilizes your money and is very essential to its accomplishment. While trying to find good mutual funds to invest in, I usually focus on the fund manager’s investment principles and performance. It is similar to a ship where you need a captain, one who has the knowledge to guide the ship through both calm and stormy weather.

A few days back, I had an opportunity to assess a fund manager managing a large-cap fund for over a decade. His returns were not as high as aggressive peers with higher risk during the bullish markets. Yet, in the challenging markets, he consistently was among the less bad funds to be invested in. The approach of being more defensive across the entire market cycle was the reason why his investors made greater returns even though they missed some bull market euphoria.

The Role of Market Cycles

By mastering market cycles, you can calculate mutual funds’ performance. A fund is expected to experience periods of decline and growth, however, the main matter is how it performs under different market conditions. You can simply check out the performance of funds in different market phases on Paytm Money using the platform.

Think about the results that small-cap mutual funds achieved during the 2020 market crash and subsequent recovery. The most successful funds were not always those that depreciated the least during the crash, but those who employed a balanced strategy and seized the dust-off. Such a case clearly shows why the point-to-point return is a misleading metric – it is essential to comprehend the path, not just the result.

Regular Monitoring and Rebalancing

Analyzing mutual fund performance isn’t a one-time activity. Markets develop, fund managers switch, and investment methods have to be modified. The strategy of mutual fund investment monitoring that I have been using for so long is undisputedly the best one.

Among the basic performance indicators, like return, rate of inflation, etc., I also look for any significant changes in mutual funds for about an hour each month. Every 3 months, I perform a more profound analysis, which includes metrics of risk and portfolio changes. At the end of every year, I check my whole mutual fund portfolio in detail making sure that it remains in line with my investment goals.

Bringing It All Together: A Practical Approach

The critical part of efficient mutual fund analysis is capturing a blend of multiple factors into a single evaluation framework. Whenever I evaluate any mutual funds from Upstox or other platforms, I review the proposed returns, risk metrics, portfolio configuration, costs, and the quality of the fund management carefully. It is important to remember that no single factor can give you all the information you need – so it is the sum that matters in the end.

In the case of fixed-income mutual funds, I try to find bonds with good credit quality and low sensitivity to interest rate change as these are key components. As for the equity funds, I am more interested in portfolio concentration and sector allocation. The concrete weights vary based on the fund and my investment objectives.

Common Mistakes to Avoid

In the course of my long involvement in mutual fund research, I’ve come across several mistakes which are quite common among investors. Striving for historical performance is probably the most common – the choice is often made to invest in funds just because they did pretty well lately. Do not forget that mutual fund performance is cyclical, and the best investor today may become the worst performer tomorrow.

Another mistake is disregarding the risk metric in favour of the return. It is not a secret to anyone that high returns imply high risk, and knowing this fact is very important in the process of making wise investment decisions. I have witnessed many investors who have acquired this knowledge during market corrections in a painful way.

Practical Examples and Case Studies

Let me share a real-world example so you understand better how this analysis framework functions. A while ago, I was trying to find the best fund out of three large-cap funds for a long-term investment. So, instead of only watching the returns, I came up with a full-on analysis:

• First, I reviewed the rolling returns over the time frame. Fund A had the highest point-to-point returns, however, Fund B displayed greater stability when using the rolling return method. Also, I realized that Fund C, even though it had lower absolute returns, had better downside protection during the market corrections.
• The second item I checked was the risk metrics. Fund A showed higher returns with a standard deviation of 22% (compared to 18% for Fund B and 16% for Fund C) which were almost uncontrolled while Fund B had a higher risk with a lower return on average. The higher risk might not be good for everybody, even though the higher returns might be tempting to them.
• Last of all, I looked through the expenses and portfolio composition. The fact that Fund B had a diversified portfolio with low expenses while Fund A’s risk was concentrated and the expense ratio was higher. Fund C set the lowest expenses but on the other hand, had the most conservative portfolio strategy.

Conclusion

Mutual funds performance evaluation is a quite complex but at the same time interesting activity that can be solved by a planned and well-structured approach. Not only the quantitative ones of such instruments such as profits and losses and risks but also the qualitative ones like those of administration and investment strategy should be your focus. Always keep in mind the profitable fund is not the one resulting in the highest gains, but the most suitable one for reaching your financial target and the fund with an acceptable level of risk.

But be careful here, do not be overly focused on the short-term aspect as far as the return on the investment and investment guidance are concerned. Use tools and platforms such as Zerodha and Paytm Money but most importantly never let other people’s talks drive your decisions to invest or not. 

For those who are interested in more peculiar information on mutual funds, look for the article “Types of Mutual Funds: Choose your Flavour“.

FAQs

How can I tell if a mutual fund has high fees?

Passive funds usually have low expense fees (those less than .5%). Active funds range from .5%-2% higher fee should go along with superior performance.

What matters most when analyzing funds – size or performance?

Size is critical because it affects manageability. A fund that is too large might be too unwieldy; if it is too small, it may be too costly to maintain. It is better to look at the processes and success rates than just the numbers.

How often should I review investments?

Give each month for quick checks, the quarter for performance and risk indicators, and yearly examine the strategy compatibility, the allocation of assets, and rebalancing as well.

When should I redeem my position in a fund?

Factors may include consistency in underperformance against the benchmark over four to six quarters, changes in managerial staff or investment style, as well as finding a better opportunity nearby. For now, tax consequences also need consideration in the exit decisions.

What’s the optimal number of mutual funds for a portfolio?

The more money you have and the more varied your financial goals, the more mutual funds you should consider. If your investment is less than ₹5 lakhs, 3-4 funds could diversify well. For fund amounts between ₹5 -20 lakhs, choose 5-7 funds. For larger portfolios, 7-10 funds can put the risk of a big loss. Too many funds can lead to trouble.