Investors often review past performance to understand how an investment (including stocks and mutual funds) has behaved over time. However, past performance does not guarantee future returns.
To assess the historical performance of a mutual fund, one should keep the following key factors in mind:
Key Factors to Evaluate a Fund’s Historical Performance
1. Expense Ratio
Check the expense ratio of the fund and compare it with peers in the same category. If a fund has a higher expense ratio but delivers similar or below-average returns compared to its peers, it may require closer evaluation.
2. Asset Allocation of the Fund
A mutual fund typically invests in a variety of assets. Therefore, review the major holdings and sector exposure of the scheme.
A fund that invests more than 65% in equities is generally considered equity-oriented, while one investing more than 65% in debt instruments is classified as debt-oriented.
Understanding asset allocation helps assess the risk level of the fund.
3. Past Returns
Compare the fund’s past returns with those of its peers in the same category and benchmark index. If the fund consistently lags behind peers during similar market cycles, it should be critically reviewed.
Look at performance across different time periods (1-year, 3-year, 5-year, etc.) rather than relying on short-term returns.
4. Industry or Sector Exposure
A fund’s performance may depend on the growth of the sectors in which it invests. For example, funds with higher exposure to technology or AI-related businesses may benefit when that sector performs well. However, sector concentration can also increase risk.
5. Fund Manager’s Experience
Just as a company is managed by its leadership team, a mutual fund is managed by a fund manager. Reviewing the fund manager’s background, experience, and track record can provide insights into investment strategy, risk management approach, and consistency of performance.
6. Other Factors
Other important considerations include:
Consistency of returns across market cycles
Performance during market downturns (such as Covid-like situations)
Speed of recovery after market corrections
Risk-adjusted performance indicators
This article is part of our Mutual Fund Learning Hub, where we answer 100+ essential questions on mutual funds in simple language to help investors make informed decisions.
