Hello Readers!!

While picking up a fund to invest in, investors often look for a top-performing mutual fund scheme of a specific category, be it Equity Mutual funds or Debt Mutual Funds. They look for various other factors like, how consistent the fund generates returns, the fund’s past performance, and of course, its performance against its benchmark index!

However, selecting a fund based only on its outperformance against its benchmark is not advisable. The reason behind this is, despite underperforming in their category, some mutual funds schemes managed to yield reasonable returns, on an individual basis. For example, despite being laggards some schemes deliver 13-14 percent annualized returns over a five-year period.

Thus, in such situations, it is often asked, whether picking up a fund based on its outperformance against its benchmark is a reliable option or should pick up a fund because it meets their return objective.

Let us see in detail!

Is Benchmark Performance Analysis Necessary?

Well, while you look at the performance of the fund that it had given in past some years, you do need to check the benchmark performance of the fund, because it gives the complete information. With volatility in performance, a managed fund portfolio may underperform its benchmark for some time.

Experts say the underperformance of any fund in its category or against its benchmark is normal when the market faces volatility. So, when does the underperformance of a fund against its benchmark matter? Only when the underperformance of any specific funds continues for more than 2-3 years, then you must ask your fund manager, about why being an actively managed fund, is unable to beat the benchmark.

Some of the actively managed mutual funds, instead of selecting an active option, just align their portfolio with the benchmark composition. As a result, their returns do not have much difference from those offered by the index funds. Thus, being an investor, before picking up any actively managed mutual fund, you must ask about the fund's outperformance against its benchmark, at least for the last 3-5 years’ time frame.

Required-Return Approach For Your Portfolio……….

When you invest in an actively managed mutual fund, it gives you the benefits of outperforming its benchmark index unlike index funds or passive funds that work to trach the performance of its benchmark index. Then what is this benchmark?

A benchmark helps in keeping your active fund within the risk boundaries defined in a category and in setting the minimum standard of performance.

When you invest in mutual funds for returns or better say when you chase returns in your investment you look for a fund that is giving the highest return in the market and will go investing in that fund without even taking into consideration its cohesive strategy or risk profiling. And this is from where the problem in your investment starts.

Thus, it is always advised to investors the best approach that you can follow while picking up a fund is your goal and the return required for your goal. A return required approach helps you best in defining the potential portfolio return. And your potential returns can be best defined by your financial goals. You only need to identify your goal, and how much money you need for your goal after how many years, that’s it, now it’s time for the right asset allocation!

For example, if you have most of your goals at least 10 years away to achieve so basically you have to look for higher asset allocation toward equity mutual funds that will obviously offer you inflation plus returns in a long-term approach. In case you have most of your goals shortly which is 2-3 years to achieve then, you must have your asset highly allocated towards, stable return fixed-income investments.

Let Us Conclude!

An investment product must have a benchmark index because it guides the investor towards the lowest cost alternative and also keeps fund managers stuck with the approach that they have to work actively towards delivering an excess return for the fee they earn.

However, benchmark index analysis is not the right choice to structure your investment portfolio, rather your goals and your expected returns are. While you start investing in mutual funds, design your asset allocation based on your goals and returns you require.

Keep reading our articles for more updates on finance and investment!!

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 to future returns).