Hello Readers!

Today a large number of people are involved in the investment sector. They have invested their money in various investment instruments, like FD’s, share market, NPS, PPF, and many but the one which is most popular among the investors in mutual fund investment.

Investors before planning their investment in mutual funds, go through various research and analysis of the schemes and their performance and then pick out one, or the best suitable fund to invest in. There are many ratios based on which the performance of mutual funds is understood by the investors, like standard deviation, alpha, beta, Sharpe ratio, etc. However, these ratios don’t inform much about the factors that affect the performance of a mutual fund.

Today through this article we are going to tell you about the factors that affect the performance of a mutual fund.

Performance Of Underlying Securities

Every mutual fund scheme has a defined strategy for their asset allocation based on which the fund manager of the specific fund invests the money collected in the fund, in different assets. So, if a fund has specified that it would invest around 80% of its investible corpus in equities and equity-related instruments and the remaining 20% in debt and money market instruments, then the fund manager ensures that this ratio is maintained while investing.

As the fund invests in a certain type of securities, thus their performance prominently depends on the performance of the underlying security. This eventually means that the performance of the fund might volatilize with the volatility in the performance of the underlying security.

Well, fund managers diversify investment across different sectors and market capitalization based on the economy and their understanding. This helps them to reduce the impact of the underperformance of eth underlying security. In a nutshell, the fund will perform based on how the underlying securities perform.

Expense Ratio 

It is a kind of operational fees charged by the AMC’s to the investors. This charge is applicable on every plan be it direct plan or regular, only the difference is that the regular charge a bit more than the direct plan.

Usually, the expense ratio of a mutual fund ranges between 0.5 and 3 percent depending on a range of factors. This can minimize the overall returns.

Cash Flows 

A mutual fund pools money from investors with the same interest, risk tolerance and goal, and then invest their money in different financial securities. If a large number of investors invest in the same mutual fund, then fund managers have a good amount of investment that they can spread across different securities to generate good benefits on the investment.

Things go evenly till the fund performs well, but once the fund starts underperforming, investors might pull out their investments causing the fund manager to sell off holdings to manage the redemption requests. This immediate and sudden cash inflow from the fund can impact the returns to much extent.

Size Of The Fund

We already studied that positive cash inflows in the fund increase or boost the performance of the fund, but the more the size of the fund increases, the more the fund manager have to become responsible and accurate with their decisions. Also, if the fund grows in size beyond a certain point, it becomes difficult to manage. A large fund that is poorly managed tends to perform poorly.

Last but not the least, in the above context we saw that the most important factor on which the performance of the fund depends is the strategies used by the fund manager, thus it is necessary to analyze the strategies and experience of the fund manager of the fund you have selected to invest. And for you as an investor, keeping track of the latest records and changes that can impact sectors or industries is important.

For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee of future returns).