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Reader’s question: I have invested in different mutual funds, but I do not know how to analyse them for better returns. I am new to mutual fund investing. Please guide me – Trichy Jayaraman
Trichy Jayaraman asks a question most mutual fund investors eventually face.
The honest answer is that most investors don't know how to analyse mutual funds. And the ones who try usually stop at last year's returns. That number alone tells you very little.
Here is a four-step framework that gives you a more complete picture.
#1 Know what kind of fund you actually own
The first step is understanding what each fund in your portfolio is supposed to do.
Many investors treat their portfolio as a collection of scheme names rather than a collection of roles. But each category of mutual fund exists for a different purpose. Equity funds deliver growth and are built for long-term wealth creation, but they come with significant short-term risk. Debt funds focus on stability and capital preservation. Hybrid funds sit in between, attempting to balance growth with risk.
Sorting your funds into these broad categories creates immediate clarity. A debt fund returning 6 per cent may be performing perfectly well for its role, while an equity fund returning 10 per cent could still be a laggard within its category. The right question is not "what did this fund return?" It is "did this fund do what it was supposed to do?"
Also check the expense ratio. A fund charging 1.5 per cent annually versus 1 per cent is a meaningful difference over 20 years. For the same level of performance, the lower-cost fund puts more money in your pocket.
#2: Use rolling returns, not one-year performance
The simplest trap in fund evaluation is the one-year return table.
A single period of outperformance or underperformance often says very little about the quality of a fund. Markets move in cycles, and a strategy that shines in one phase may struggle in another.
A more useful approach is rolling returns, a method that measures a fund's performance across many overlapping time periods rather than a single start and end date. Instead of looking at returns from January 2020 to January 2025, rolling returns calculate performance for every possible five-year window within that period. This reveals whether a fund has consistently beaten its benchmark or whether its success was limited to a few favourable market conditions.
If a fund shows strong rolling returns across multiple periods and market cycles, that consistency is worth more than a single standout year.
#3: Measure risk, not just returns
Two funds may show similar long-term returns, yet the journey to those returns can be very different. One may have delivered them with sharp ups and downs, while the other moved more steadily.
The difference lies in risk. Standard deviation measures how widely a fund's returns fluctuate over time. A highly volatile fund may eventually deliver strong returns, but the ride can test an investor's patience during market downturns and lead to poor decisions at the worst possible moment.
The Sharpe ratio adds another layer by assessing how efficiently a fund converts risk into returns. Put simply, they ask whether the returns earned justify the level of volatility taken to achieve them.
For hybrid funds, which are designed to offer a smoother experience, these measures are especially useful. They reveal whether the strategy is actually delivering the stability it promises.
For debt funds, the lens shifts further. Higher yields in a debt fund often come from taking on additional credit risk. Check the credit quality of the fund's holdings and how well the portfolio is spread across different issuers.
#4: Check if the fund is doing what it promised
Finally, look at what the fund actually owns.
Is it concentrated in a few securities or diversified across many? When a large portion of a fund's money is tied to a small set of stocks or issuers, its performance becomes closely linked to the fortunes of those few holdings.
Also check for style discipline. A fund labelled as large-cap but increasingly buying mid-cap stocks to chase returns may look impressive in favourable market conditions. But this shift exposes investors to risks they did not intend to take and often shows up only when conditions turn.
When should you exit a mutual fund?
Exit a mutual fund when it shows persistent underperformance across multiple-year periods and not just one bad year. Also consider exiting if the fund has drifted from its stated strategy, or if it now overlaps heavily with other funds you already hold. Temporary underperformance due to market cycles is normal and rarely a reason to switch.
Reviewing a fund does not mean replacing it. Frequent switching is one of the most damaging habits investors develop. It locks in losses, triggers taxes and disrupts the compounding that makes long-term investing work.
What deserves attention is persistence. If a fund has repeatedly fallen behind its benchmark and peers across several multi-year periods, or if its portfolio has quietly drifted away from what it set out to do, it may be time to look for alternatives.
The bottom line
All of this requires a framework and the discipline to apply it regularly.
If doing this across every fund in your portfolio feels like more than you can manage alongside everything else, you don't have to do it manually. Value Research Fund Advisor lets you import your portfolio and analyses your funds for you, identifying which ones to keep, which to reconsider and which analyst-recommended funds might better fit your goals.
The four steps above are the thinking behind it. The tool does the legwork.
This article was originally published on March 09, 2026, and last updated on May 20, 2026.
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