How To Analyse Your Mutual Fund Portfolio?

Mutual funds make investing easy for people who do not have the time to study and invest in individual stocks. It offers the diversification that most investors seek. However, even with mutual funds, you need to ensure that you’re on the right track. 

By the end of this guide, you will have a comprehensive understanding of the key aspects of evaluating your mutual fund portfolio. Learn how to analyze your portfolio in 5 easy steps and rebalance your portfolio, ensuring it continues to work for you.

Why Do You Need To Evaluate Your Mutual Fund Portfolio?

It’s important to evaluate your mutual funds regularly to make the most of your investments. Analysis of your investments plays a crucial role given the constantly changing market trends and economic conditions.

Here’s why you must analyse your mutual fund portfolio performance:

• Better Understanding:  Gain an overview of how your portfolio is performing and if it aligns with your financial goals
• Identify Losses: Understand areas of losses and proactively make changes to maximise returns.
• Evaluate Expenses: Check the expenses on your existing portfolio and potential investments

5 Key Steps To Follow When Analysing Your Portfolio

Whether you’re in the stage of building, or optimising your portfolio, It is important to analyse the performance of the funds in your portfolio. Regularly analysing your portfolio’s performance, helps maximise returns and minimise losses. 

Here are 5 key steps you need to follow when analysing your portfolio:

Step 1: Compare the fund’s performance to it’s benchmark

The first step of your analysis process is to measure the performance of a fund against its benchmark. Every fund has a benchmark against which it is tracked and measured. 

For example, a Large Cap Mutual Fund will be measured against the NIFTY 50 Index. Similarly, a Small Cap Mutual Fund will be measured against NIFTY Small Cap. 

A fund is considered good if its performance constantly beats the performance of its benchmark in the long term. This gives you a clear picture of the fund's performance in the market.

Step 2: Consider the expense ratio of the fund

All mutual funds include an expense ratio. This is a fee charged by the fund houses to manage your fund.
In hindsight, the expense ratio might seem like a nominal amount but when you consider the compounded returns, it is huge.

To avoid this choose funds with a lower expense ratio or switch to zero-commission mutual funds. For more information on switching to direct mutual funds, check out Switch Regular to Direct Mutual Funds.

Step 3: Assess the risk and volatility measure of the fund

The next step of the analysis process is looking at the Standard Deviation & Sharpe Ratio which gives you the risk and volatility measure of a fund.

Standard deviation tells us how much the returns go up and down. A low standard deviation means the returns are pretty steady, and a high standard deviation means the returns can change a lot.

Sharpe ratio, on the other hand, looks at how much return an investment is making and compares it to how much risk it took to get that return. As a rule of thumb, a Sharpe ratio above 1 is considered good, above 2 is very good, and above 3 is excellent. 

Step 4: Review the funds' holdings

Review the underlying assets of a fund to see if the fund has diversified its investment across sectors or has a major concentration of investments in one sector.

Check the fund’s turnover ratio, which indicates how frequently the fund buys and sells its holdings. Also, gain an understanding of how the funds’ holdings have changed over time.

Step 5: Check the fund manager's track record

Apart from the above checkpoints, it might also be helpful to check the fund manager’s tenure. A manager’s tenure is the period for which that manager has been leading that mutual fund.

A manager’s tenure of 5-10 years is usually a good indicator of a fund manager's investing ability. A longer tenure can mean better long-term performance and stability.  

Tools That Help You Analyse Your Mutual Fund Portfolio 

To follow the above metrics, simply refer to the factsheet of any fund.

If you need a more hands-down method to analyse your funds, you can try INDmoney’s FREE Mutual Fund Portfolio Scan. We’ve built this tool to help you analyse your mutual fund portfolio on the go. 

All you’ll have to do is sync all your mutual funds to get a single view of your entire portfolio. The app then scans and analyses your portfolio and suggests action items to optimise your investments.

So you can easily find out:

• Which fund is underperforming
• Which fund is beating the benchmark
• The sectoral allocation of your funds
• The expense ratio of your funds
• Hidden commissions in your funds, if any

Conclusion

Once you’ve analysed your portfolio, implement your learnings to optimise and rebalance it. Ensure your portfolio is well-diversified and aligns with your risk tolerance.

With consistent analysis and rebalancing, you can optimise your investments, manage risks, and ensure you stay aligned with your financial goals.