Analyzing Mutual Funds for Maximum Return
As an investor, you should aim to diversify your investments in order to gain maximum returns with limited risk. With a comprehensive range of investment avenues, it might get overwhelming to keep a track of all your investments and the returns generated on them. One such popular investment avenue is mutual funds. Mutual funds have a rowdy timeline and it could get difficult to catch every shrink and swell. Mutual fund schemes delivering substantial results might not work anymore. Investors need clear indications of the trend and ought to learn how to analyze mutual fund investments. This article will cover a few tips to successfully analyze your investments.
- Apples to apples: Compare your fund to appropriate benchmarks
You should ensure that you compare your mutual fund investment to an appropriate benchmark. For instance, if you analyze how well your fund is performing, it’s best to compare it with the average returns of the funds in the same category.
- Understand the economic cycle
Time periods are crucial tools to understand which fund is performing best. However, removing the fund from the portfolio for one bad year is not the right attitude. Judging a bond or a stock for one bad year would be overstepping too soon.
- Use weights to measure fund performance
Popular time periods for the performance of your mutual funds include returns gathered from 1-year, 3-year, 5-year and 10-years. If you were to allot weightage to the funds in the order of which you would give more preference to, weigh the 5-year investment as the heaviest, followed by 10-year, 3-year and 1-year.
- Take manager tenure into account
Management tenure, also known as manager tenure is the amount of time that a manager has been at the helm of a mutual fund. It is essential to analyze manager tenure along with fund performance. For instance, a strong 5-year return means nothing if the manager is at the helm for just a year.
- Get acquainted with mutual fund statistics
In order to better analyze your portfolio, it is important to apprehend the basic terms and statistics linked to mutual funds. Most investors are accustomed to the price-earnings ratio (P/E ratio) as they are the easiest to examine. This ratio aids to figure if the fund is growth-oriented or value-oriented.
- Differentiate between good and bad performance
Individuals should be able to comprehend when the mutual fund performance is decent and when it is bad. A fund that might have performed exceptionally well in the past year, might not perform equally well in a three-year period. Hence, abnormally high returns do not always equal good performance.
Putting all of the above factors together, you can make smart decisions about buying the best mutual funds for your portfolio. With several types of mutual funds available to an individual, be mindful of investing in mutual funds that align with your personal and financial goals. Happy investing!