Mutual Fund Performance: What are the Factors that Affect the Performance of Mutual Funds?

Mutual Fund Performance: What is Mutual Fund?

For many people investing in mutual funds seems a bit complicated or somewhat intimidating. Well, with the help of this article, we are going to make it easier for you to understand what mutual funds are, their benefits, and their mutual fund's performance. Essentially, in a mutual fund, many people come together for the money pool for investment. A mutual fund company collects money from investors or people with a common investment objective. 

Once the money is collected, it invests that money in equities, bonds, money market instruments, and other securities. Here if you are a part of the investment pool, you will have your units, which represent your share of the portion of the fund's holdings. 

The gain you will be making on your mutual fund investments are distributed proportionally based on the percentage of the investment after deducting certain expenses from the company. This is done by calculating Net Asset Value or NAV. 

Benefits of Investing In Mutual Funds in India

Investing could be a little tricky and overwhelming at the same time. Several investment options include stocks, bonds, real estate, and money market accounts. But the one which is a lot more talked about is mutual funds. Mutual funds are also considered one of the most secure options for investing your money and keeping yourself safe from losses. If you are considering investing in mutual funds, read out these critical advantages as they show how mutual funds cater to the needs of different user saving goals. 

• The most significant advantage of investing your money in mutual funds is that professionals will manage your assets with years of experience in investment. This reduces the risk of making mistakes and getting huge losses. 
• Portfolio diversification is another advantage that makes mutual funds a great way to invest money in. It reduces the risk because not all stocks make losses simultaneously and proportionally. 
• Convenient administration in mutual funds leads to reduced usage of paperwork and bad deliveries. 
• The cost involved in mutual funds is pretty affordable, and they are relatively less expensive if we compare it with direct investing in the capital market.
• Mutual fund investment companies keep things as transparent as possible with the help of account statements. Besides this, you can even check out the complete statement via portfolio disclosures. 
• In addition, several mutual fund schemes match precisely what you are looking for. This will increase your risk tolerance along with your investment horizon. 

What Affects Mutual Fund Performance?

One needs to understand the importance of mutual funds' performance because it is the sole factor in deciding how much profit you are going to make from your investment. Apart from this, many investors want to invest in mutual funds because you will be sharing the ownership in mutual funds as compared to owning a single stock. Given below are some of the main factors which affect how your gains will be mapped in your mutual fund's investment. 

Performance Of The Securities In The Fund Portfolio

A mutual fund is more like a basket of securities, and funds invest in specific securities. In most cases, the objective of mutual funds investors is to invest 60% to 70% of the assets in equity and equity-related instruments. The remaining ones can be invested in debt securities. Fund managers use diversification to lower the risk of loss in case of market turmoil. 

The diversification can be done based on the sectors, market capitalizations, geographics, and other factors as well. A fund portfolio is quite diversified so as to have minimal impact on the market downturn. As a result, the performance of the funds is heavily dependent on the securities present in the portfolio. 

Fund Management Team

The experience of the fund management team could play a significant role as they are actively managing your portfolio through periodic reviews and analysis. As a result, the selection of the fund manager's security selection, along with the time of investment, could make or break the performance of your mutual fund. That is why investors are always looking for fund managers with high experience and a good track record which shows their efficiency in making good investment decisions. 

Economic Changes

One of the other essential things you need to keep an eye on, which affects the performance of mutual funds, is how well its specific sector or industry is performing. This is because some of the industries which are prone to constant policy changes by the government can result in a significant impact on your portfolio. For instance, during the COVID-19 pandemic, the healthcare industry was one that didn't get hit as hard as the other sectors. On the other hand, it has seen massive growth with the increase in the requirement for medical care. 

If your securities in mutual funds are invested and have high exposure to just one sector, a positive trend could make you massive gains. But at the same time, if that industry got hit hard by an uncertain policy, the mutual fund's performance would see a negative impact as well. 

Expense Ratio 

A fund house is going to charge you a certain amount of fees for its portfolio management services. This fee is known as the expense ratio, and it is the combination of all the costs and fees that go into running and managing your mutual funds. According to SEBI guidelines, a mutual fund house cannot charge a total expense ratio of more than 2.2%. Having a higher expense ratio could result in a decrease in your profit numbers. That's why it is best to find a fund management service that comes with a low expense ratio.

Assets Under Management (AUM)

The size of your investment and the size of your mutual fund matter. Bigger the mutual fund investment better results it will show over its period. Having too many funds or too few funds leads to a negative impact on your mutual fund performance. On the other hand, if the fund size becomes too big, it becomes complicated for the fund manager to keep an eye on every single investment. 

Fund Cash Flows

A mutual fund pools money from a number of investors, and these investors have similar financial goals along with similar risk tolerance levels. If investors have money to put in a mutual fund scheme, the fund manager can quickly invest it in multiple securities with significant assets so as to make it more diversified.

On the contrary, if the mutual fund's performance is not up to the mark and investors start pulling their money out, the fund manager will sell off some of the holdings in order to fulfill the redemption requests of the investors. This could easily hurt the cash flow of the mutual fund and its performance at the same time. 

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Conclusion

So this is how one can know how to find the performance of mutual funds. The benefits of mutual funds are pretty compelling for all categories and risk-taking appetites. Investing in MF schemes will help you generate long-term wealth on a sum that would remain ideal otherwise on your savings account. We hope this article has helped you understand the working of Mutual fund performance and how it should be noted by an investor before putting money in any MF plan.