Last Updated on December 31, 2015 at 3:05 pm
A method to analyse mutual fund performance during a particular investment duration in terms of consistency of returns is discussed in this post.
Many mutual fund investors are unable to rationally analyse the performance of their equity mutual fund holdings and often ask, When should I exit an equity mutual fund?. I would like to suggest simply ways in which mutual fund performance can be analyzed objectively. As always, there are multiple solutions to most problems in life, and what is suggested is one such solution. I suggest this, because this is what I would do.
When it comes to mutual fund performance analysis, the key point to remember is that a fund should be analyzed over the period in which we have held units and ONLY over the period in which we have held units.
The reason for this is quite simple. Mutual funds invest in securities that are marketed to market. That is the current value of a mutual fund portfolio is equal to the current market value. This current market value fluctuates quite a bit for equity and the rise, fall and amount of fluctuations crucially depend on the period chosen for study.
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This is the key reason why you should ignore mutual fund star ratings.
The ratings agency assigns a star rating over a different period than your investment period. Therefore, their analysis will be entirely different from yours.
So unless you can do a peer comparison over your investment period, Star ratings are of no use.
If the investment duration is reasonably long (at least 3 plus years), one can consider using the Mutual Fund SIP XIRR Fluctuations Tracker Version 2.0. Here you can set the start of the SIP as your own and compare the XIRR of the SIP investment month after month with the benchmark. This gives you an idea of how well the fund has performed wrt to its benchmark for the period in which you invested. If this is reasonable (fund has bet the benchmark for most months), stay invested and do nothing.
If your goal is 15+ years away, I suggest not even looking at the investment performance for at least 4/5 years. After that one can review a bit more frequently.
A more powerful tool is the Mutual Fund SIP Rolling Returns Calculator. Here one can use the total returns indices (values need to updated manually from links provided) from BSE: Sensex, BSE 200 and BSE500 to compare the SIP returns for a given duration say, 5 years with the duration rolled over each business day. This would tell you, how consistently the fund has performed over every possible 5 year duration between any two dates. To learn more about how rolling returns are computed you can check out the corresponding calculator for lump sum returns: Multi-index Mutual Fund Rolling Returns Calculator.
Notice that for a 5-year SIP, the fund has reasonably manged to beat the total returns index after accounting for expenses. I don’t know about you, but as far as I am concerned, I am more than happy with that performance. So I continue to hold HDFC Equity (a two-star fund btw).
The point of this post is to to urge you to analyse your fund holdings for the period you have held that. That is likely to give you an entirely different, and in my opininon the most relevant, perspective about what you should do with your fund holdings.
There are many other ways of analyzing mutual fund performance. I have focussed on consistentcy of returns or rather the consistent of outperformance. Once can also consider downside protection with this tool: Mutual Fund Downside Protection Calculator
Do let me know what you think.