Using financial terms that are not commonly understood, creates a jargon to investors who are new to the MF Avenue. In order to eliminate this problem, SEBI has come up with a solution where the MF houses have been advised to publish the value of return the investor will get when a certain sum of money is invested, instead of publishing the CAGR or Compounded Annual Growth Rate, which otherwise, is accepted internationally.
As a prudent investor, you need to evaluate your Mutual Funds on grounds that can entitle you to earn higher returns in the future with the hope of a secure SIP route.
- Basis of performance:
Before you choose your MF, it is very important that you evaluate mutual funds performance. Performance can be evaluated based on:
Risk
Return
Span of investment
- Basis of fund’s objectives:
You need to closely evaluate whether your objective and the fund’s objectives are on par. It is important to understand that Mutual Funds of a particular objective or style may not do well across all market cycles. So, depending on the market conditions, you need to evaluate your objectives for investing in a particular MF.
- Basis of the benchmark chosen:
Depending on the previous point, it is important to measure the fund’s performance against the benchmark it has chosen. The benchmark that has been chosen by an MF should be closely related to the objectives it has adopted. For example, if a fund house invests in small and mid cap investments, it cannot compare itself with NIFTY. If the benchmark is set to -16% and the MF makes returns of 9%, it cannot be called a performer.
- Basis of investments:
If a particular fund house, takes the liberty of moving away from its objectives and taking the risk of investing in avenues so as to make good returns, and manages to do as well, it is considered risky and such approaches should be avoided. For once or twice such jumps can go right but otherwise, you might get into loses and even get into a debt trap by acquiring a personal loan or a credit card loan to fulfill your financial requirements.
- Basis of returns:
You cannot evaluate a fund’s prospective growth in future by analyzing its past performance. The reason is because the markets are highly dynamic in nature. The movement of which can be predicted only upto a certain level. If a particular fund has performed well in the past, it is not necessary that it will do so in future as well.