How to evaluate the performance of your equity fund investment?

As an investor, you know that selecting the right equity fund demands a lot of market research and analysis. You may have evaluated factors, such as the fund’s management team, historical performance, and asset allocation strategy, before deciding which fund to invest in. But, choosing a fund is just the first step in a long term process.

While equity funds can offer good returns over the long term, monitoring and evaluating your investments regularly is crucial to ensure that they are meeting your expected returns. This is especially important during market volatility and economic uncertainty, as even the most strategic investments can experience fluctuations in performance.

So, how can you evaluate the performance of your equity investments? What are the critical factors that you should consider beyond short term returns? Let’s find out. 

  1. Understand the benchmark

Fund houses generally declare a benchmark index, such as the Nifty or the Sensex, for every scheme to provide a context for its performance. By comparing the performance of your equity fund to the benchmark, you can get a good idea of how well it is performing with time.

For example, if your equity fund is behind its respective benchmark in different market cycles, you should find out why your fund is not performing well. In case, the fund outperforms the benchmark; it may be a sign that the fund is still aligned with your investment strategy. 

  1. Check performance over different time frames

Try not to base your mutual fund investment decisions on short-term gains or losses. Performance of equity funds tend to fluctuate quite significantly, hence evaluate them over a longer period. A period of 5 to 10 years is recommended along with considering market trends and any major events that occurred during that time. This will give you a more accurate long term picture of your investments. 

  1. Evaluate the fund’s risk-adjusted returns

A high return on investment can indicate good performance, but it may come with higher risk. So, evaluating the fund’s risk-adjusted returns is important. Risk adjusted return is a measure of an investment’s performance that factors in the level of risk were taken to achieve that performance.

For example, two mutual funds investment plans can have the same returns, but one may be more volatile, indicating that it has higher risk-adjusted returns. 

  1. Compare your fund performance with other funds in the same category

Comparing your fund with other funds in the same category can give you an idea of its performance and risk management. Compare key performance metrics such as fund’s returns, risks, and assets under management with similar funds.

While comparing, make sure you check the fee structure of the mutual fund schemes as well. For example, let’s say the equity fund you have invested in has a 1.5% expense ratio. If another fund in the same category has an expense ratio of 0.5% and both funds have generated similar returns, it may indicate that you are paying a higher fee than necessary and getting less returns despite the same performance. 

To wrap up

Remember, investing is a long-term process, and short-term fluctuations should not affect your overall investment plan. So, assess the performance of your equity funds from time to time and make adjustments when necessary toward meeting your financial goals over time.

Follow methods such as analysing the net asset value (NAV), annual returns, and comparing performance against benchmarks to understand your investments better. Looking at other metrics like risk-adjusted returns, expense ratios, and asset allocation can further highlight areas of improvement and help you optimise your equity fund returns.

Most importantly, diversify your portfolio across different asset classes for more stability and less risk. You can take guidance from a financial advisor who can assess your risk tolerance, analyse your portfolio, monitor market trends, and provide professional advice accordingly.