10 Tools for Evaluation and Analysis of Mutual Fund Investments

10 Tools for Evaluation and Analysis of Mutual Fund Investments

Roboadviso     Mutual Funds     Posted On, Sat 2nd September, 2017     No comments

Mutual fund portfolio analysis tools

Mutual funds come with several benefits to investors, including liquidity, professional management, diversification, etc.

Selecting the right scheme that is suitable to your needs can however be quite tricky. Thus, in addition to the information provided above, investors may use the below listed tools to analyze mutual fund schemes so as to make smart investments that meet their needs.

  • Credit rating: It is applicable for mutual fund debt schemes. All debt papers are rated by different credit rating agencies, and each agency uses its own methodology to arrive at the specific rating. Government debt bonds are risk-free. The credit rating needs to be checked for corporate papers, which can be AAA, which is the highest, and D, which is the lowest. Debt funds are good for short or medium term investments. Since these should be low to moderate risk, investors need to go for bonds or papers with higher credit ratings.


  • Maturity Profile/Average Maturity: It is applicable only for debt schemes and indicates average maturity of total debt instruments in a scheme. It may be noted that different papers have different maturity terms. Papers with long-term maturity are sensitive to interest rate movements and this can affect their market price. Long-duration debt securities offer high yields with interest rate fall, while it offers low returns if interest rates rise.


  • Portfolio Concentration Ratio: It indicates the quantity and areas of investment by the mutual fund. Normal range for top 5 stocks is between 30 and 40 percent. In diversified funds, top 5 stocks normal range is between 30 and 60 percent. Avoid funds with excessive concentration and opt for diversified funds.


  • Portfolio Turnover Ratio: It shows the frequency of trade in fund portfolio. Passively managed funds have low portfolio turnover ratio, while it can be as high as 500 percent in actively managed equity funds. It is compared within category. Long-term, passive, purchase and hold investors should choose schemes with low turnover ratio, while active investors can opt for funds with higher ratio.


  • Sharpe Ratio: It indicates yields per unit to the total risk assumed by the fund. Investors need to compare ratio within fund category; if the Sharpe ratio is higher than category average, then it indicates higher yield per unit of risk.


  • Exit Load: It is the penalty fee that investors need to pay for leaving the fund early. It typically ranges between 0 to 1 percent. It is charged as per load structure during during redemption of fund. A low exit load is good for investors.


  • Treynor’s Ratio: It shows yield per unit of market risk. It is compared within categories. If ratio is higher than category average, then it means higher return per unit of market risk.


  • Expense Ratio: It refers to yearly expenses charged by the fund to the investor. It falls between 0.1 percent for plans with fixed maturity to 2.5 percent for small size equity schemes. Low expense ratio is good for investors. It is essential to especially check expense ratio of debt schemes as they offer same gross returns. 


  • Standard Deviation: It shows volatility in returns of a fund and thus is indicative of the portfolio risk. Lower standard deviation is good for investors. It however needs to be compared within categories. It ranges from under 1 percent for liquid schemes to 20 to 40 percent for equity mutual funds.


  • Beta: It shows the performance of the fund as compared to market performance. If the beta value is 1 then it indicates that the NAV of the scheme moves along with the market. If it is more than 1, then it means that fund is more unpredictable than market, while less than 1 beta value indicates less volatility of fund than market.

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