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How can one assess the performance of a mutual fund scheme?

Dhirendra Kumar talks about the mechanism of evaluating fund returns

How can one assess the performance of a mutual fund scheme?

One can easily assess the performance of dividend plans of mutual fund schemes by looking at the declared dividends over the past years. How should one assess the performance of growth plans?
- Padam Dev Law

Firstly, it is wrong to conclude that if your fund is giving dividends, it is doing well because it might be giving dividends but still perform very poorly. So the only way of measuring accurately how your fund is doing is by looking at the returns. This means measuring the worth of your investment today, including the dividends cash flow you got in between. You should also factor in tax liability arising from them.

To measure returns of a mutual fund, you can come to, type the name of any fund and look at the performance tab where you get returns for three months, one year, five years, and any period of your choice. You also get the relative performance as to the return of other funds, the average of similar kinds of funds which is called the category average returns, and comparison with the most relevant benchmark for that category. For example, if you compare a large-cap fund, the benchmark would be Sensex or Nifty. This benchmark comparison would tell you that if you had done nothing and just invested in an index fund, how much would have been the return as against the return given by the fund.

A more robust return evaluation can be done by using rolling returns instead of trailing returns. Rolling return is nothing but trailing returns over a period. This helps to keep recency bias and luck factor out of the play. One year rolling return means calculating one-year return every day for any chosen period, say the last one year, and doing an average of it. This tells the indicative return that an investor in the fund would have got irrespective of the entry date in the last year. For example, a one-year trailing return means if one year ago you invested Rs 100, what is the worth of that Rs 100 today. On the other hand, rolling return means calculating one year return on each date of the last one year and doing an average of all these readings.

There are two other ways in which you can evaluate the performance of a fund. One is by going through the specific fund fact sheet to get the return data. The other and the most precise way of measuring performance if you have already invested in a fund is by maintaining your portfolio at Value Research portfolio manager - My investments. It considers your investments at different dates, whether by way of SIP or lumpsum, your withdrawals, and dividends received in between to give your actual percentage return per annum.

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