5- Factors to Consider when Analysing Mutual Funds
Mutual funds are unique financial instruments that pool funds from multiple investors and invest in a plethora of different assets. These assets can be stocks, bonds, debentures or a mix of both. Since mutual funds invest in market-linked securities, their performance is directly correlated with the market movements. That said, due to the differences in asset allocations, not all funds may perform equally over the same period. This makes mutual fund performance a crucial factor you need to consider before investing. Continue reading to find out more about how to evaluate a mutual fund.
What is the return in a Mutual Fund?
Return, in the context of a mutual fund, can be referred to as the gain or loss you realize from your investment in the fund over a specific time period. It is usually expressed as a percentage of the invested amount. For instance, let’s say that the 1-year return of a mutual fund is 10% per annum. If you had invested Rs. 1 lakh a year ago, you would now have Rs. 1.1 lakhs. The capital appreciation of Rs. 10,000 would be the return in a mutual fund.
Why is it important to analyze Mutual Fund performance?
Now that you know what the return of a mutual fund is, let’s address the importance of mutual fund performance analysis. There are three primary reasons why you should always analyze a fund’s performance before investing.
It helps you assess whether the fund matches your investment objectives and gives you insights into its risk profile.
It allows you to compare its returns with that of a benchmark index.
It enables you to do a cost-benefit analysis, where you can assess whether the returns generated by the fund justify the costs associated with it.
Step-By-Step Guide to Track Mutual Fund Performance
Contrary to popular opinion, analysing mutual fund performance is not very complicated. In fact, it is very easy as long as you follow the steps outlined below.
Benchmark Comparison
Every mutual fund has an index it is benchmarked to. Benchmarking is done specifically to enable both the fund manager as well as the investors to evaluate the fund’s performance. Comparing the returns generated by the fund with the benchmark index can give you insights into how well the fund has performed relative to the broader market. Ideally, a mutual fund must consistently outperform its benchmark index.
Comparison With Similar Mutual Funds
Another good way to analyze mutual fund performance is to compare its returns with its peers. Now, it is important to remember that not all funds have the exact portfolio of assets or the same allocation ratio. Therefore, it is important to first ensure that the funds you’re comparing have nearly the same portfolio of assets and allocation ratio.
Expense Ratio Analysis
The expense ratio is a fee that Asset Management Companies (AMCs) levy. The fee is used to cover the expenses associated with managing and administering the fund. The expense ratio is expressed as a percentage of the invested amount. The higher this ratio is, the lower your returns are likely to be. Therefore, this is something that you need to factor in when analyzing mutual fund performance.
External Factors Like The Market And Economic Cycles
When determining the performance of a fund, simply looking at the numbers may not provide you with the context you need to make a well-informed decision. You need to also take into account external factors like the economic and market cycles, which have a major impact on the fund’s performance. A fund that produces low returns may not always be a bad investment if its performance is due to unfavorable and volatile market and economic conditions.
Consider The Mutual Fund Risk Profile
Every mutual fund has its own risk profile. Some funds like those that invest in equity can be high risk, while others like debt funds may have a more moderate risk profile. When analyzing mutual fund performance it is crucial to also account for its risk profile.
Doing so can help you determine the risk-reward ratio and whether the returns produced by the fund are worth the risk you take by investing in it. As a general rule of thumb, the higher the mutual fund risk, the greater its returns must be.Fund Manager’s Track Record
When analysing mutual fund performance, it is also important to look into the fund manager’s track record and tenure. A change in the fund manager can have a major impact on how the fund performs. A mutual fund with an experienced manager and a consistent track record is likely to do better in the future than a fund with a relatively inexperienced manager.
Conclusion
Following the steps outlined above should help you make an informed investment decision. Now, it is essential to note that analysing mutual fund performance is a necessary skill you need to hone before you begin investing your hard-earned money.
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Can Mutual Fund Schemes Invest in Upcoming IPOs? - H1 Initial Public Offerings (IPOs) have become a buzzword among investors looking for high-growth opportunities. Whether it’s a unicorn startup going public or a reputed company entering the equity market, IPOs attract substantial interest. But what about mutual funds — can they participate in IPOs? And if yes, how does it impact you as an investor in a mutual fund? This article explores the role of mutual funds that invest in IPOs, the process behind such investments, and how you can benefit from this strategy. You’ll also gain insights into how fund managers evaluate IPO opportunities and which mutual funds are more likely to invest in them. Role of Mutual Funds in Equity Markets - H2 Mutual funds play a vital role in India’s equity markets. Managed by professional fund managers, these pooled investment vehicles collect money from multiple investors and allocate it across a portfolio of stocks, bonds, or other assets based on the fund's mandate. In the context of equity investing, mutual funds: Provide diversification to small investors Help in price discovery and market depth Act as long-term institutional investors Reduce risk through strategic asset allocation Given their market presence and influence, mutual funds also participate in IPOs, often subscribing to large portions of new issuances. But this activity is more nuanced than simply bidding for shares. Are Mutual Funds Allowed to Invest in IPOs? - H2 Yes, mutual funds in India are allowed to invest in IPOs — both in the primary market (where shares are first issued) and in the secondary market (where stocks are traded after listing). This means mutual funds can apply for shares during an IPO’s book-building process just like retail investors, high-net-worth individuals (HNIs), and institutional investors. SEBI regulations allow fund managers to allocate a portion of the fund’s assets to IPOs, provided the investment aligns with the scheme's objectives and risk profile. For instance: A large-cap fund may only invest in IPOs of companies expected to be included in large-cap indices A multi-cap or flexi-cap fund has more flexibility to take exposure across market capitalisations, including IPOs An ELSS fund (Equity-Linked Savings Scheme) can also participate in IPOs if it aligns with its tax-saving and equity investment objective So, the short answer is: Yes, mutual funds can and do invest in IPOs — but not all funds, and not always. Why and When Do Mutual Funds Invest in IPOs? - H2 Investing in IPOs offers mutual fund managers several strategic advantages, including: 1. Access to Early Growth Potential - H3 Many IPOs are of young, fast-growing companies. By investing early, mutual funds aim to capture the growth upside before the stock gains mainstream popularity. 2. Price Arbitrage Opportunities - H3 If a mutual fund believes that the IPO is underpriced relative to its intrinsic value, it may invest with the intent of benefiting from listing gains or long-term appreciation. 3. Portfolio Enhancement - H3 Some IPOs bring fresh sector exposure or innovation to the market. Fund managers may invest to diversify or rebalance the portfolio with new-age businesses, like fintech or EV startups. 4. Long-Term Bets - H3 Fund managers often look at IPOs with a long-term lens. The goal isn’t always listing gains but building a position in a company expected to perform well over years. 5. Demand and Liquidity Trends - H3 In bullish markets, IPOs tend to be oversubscribed and see strong listing premiums. 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Promoter and Management Track Record - H3 A critical evaluation is made on the credibility, governance standards, and historical performance of the promoters and top management. 4. Utilisation of IPO Proceeds - H3 Fund managers study how the company plans to use the funds—whether for debt repayment, expansion, or general corporate purposes. 5. Macroeconomic and Sector Trends - H3 Sectoral outlooks, regulatory policies, and broader market sentiments also influence IPO investment decisions. 6. Anchor Book Participation - H3 Strong interest from anchor investors (like global funds or sovereign wealth funds) signals confidence in the issue, making it more attractive for mutual fund participation. Best IPO Mutual Funds: What to Look For - H2 If you're keen on gaining exposure to IPOs through mutual funds, it's important to choose the right type of fund. While there’s no official category called “IPO mutual funds,” some schemes actively participate in upcoming IPOs. Here’s what you should look for when selecting such a fund: 1. Fund Category and Investment Mandate - H3 Start by checking the category of the fund. Flexi-cap, multi-cap, and mid-cap funds generally have more leeway to invest in IPOs. These funds are not restricted to a single market capitalisation and often aim to capture high-growth opportunities, making them ideal for IPO exposure. 2. Track Record of Participating in IPOs - H3 Review the fund’s portfolio history. Some mutual funds consistently allocate a portion of their assets to new listings. You can find this information in the fund’s monthly factsheet or portfolio disclosure. Look for funds that have a pattern of investing in IPOs over time—not just as a one-off move. 3. Fund Manager's Experience and Strategy - H3 A skilled fund manager makes a significant difference. The manager's ability to evaluate IPO valuations, industry potential, and company fundamentals is crucial. Look for funds managed by professionals with a proven track record in equity investing and a sound IPO selection approach. 4. Diversification and Risk Management - H3 An ideal fund won’t rely heavily on IPOs alone. Instead, it will use IPO investments as part of a broader equity strategy. Ensure that the fund holds a well-diversified portfolio alongside its IPO allocations to reduce volatility and balance risk. 5. Consistent Performance Over Market Cycles - H3 While past performance isn’t a guarantee of future returns, funds that have consistently performed well across different market cycles often reflect strong management and strategy. Look at long-term performance metrics like 3-year or 5-year returns instead of just recent gains. 6. Transparency and Reporting - H3 Good IPO-investing funds are transparent about their holdings. Choose funds that provide detailed disclosures about their portfolio, including new IPO allocations, so you can track how your money is being deployed. Also, read the scheme information document (SID) to understand the fund’s mandate and whether it allows active IPO participation. Should You Invest in a Mutual Fund That Invests in IPOs? - H2 Pros: Access to IPOs without applying individually Professional due diligence and analysis Built-in diversification Potential to capture high-growth opportunities Cons: IPO investments may not always succeed May increase portfolio volatility Returns can be affected by market timing and sentiment If you're a long-term investor, funds that occasionally invest in IPOs can be a good addition to your portfolio — but don’t chase IPO exposure alone. Always assess the fund holistically. Conclusion - H2 Yes, mutual fund schemes in India can and do invest in IPOs, but they do so strategically — not emotionally or impulsively. Fund managers assess multiple factors before deciding to put your money in newly-listed companies. 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