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Every investor feels relieved after seeing green numbers in the mutual fund portfolio. But is your money really growing at the same speed as the market? Many times we get fooled just by looking at the return figures, whereas in reality our fund is growing much slower than others. Investing in the market does not just mean investing money, but also giving it the right momentum. If you too are satisfied with your portfolio just because it is not in loss, then now is the time to do a proper 'health checkup' of it.
Don't be happy with FD returns, the real game is to beat inflation.
The most basic rule of every investment is that it should exceed the inflation rate. At present, if the inflation rate remains around 6 percent and your returns are also around the same, then actually you are not making profits. The value of your capital is gradually decreasing. In today's market, bank fixed deposits (FD) and many government schemes are easily giving 6 to 7 percent interest without any big risk. Therefore, when you venture into a risky option like mutual funds, your expectations should also be high. Long-term equity mutual fund investments generally require an average return of at least 12 percent.
Is your money moving slowly?
Suppose your fund is giving 10 percent return and you are very happy with it. But did you check that other funds in the same category are sharing profits of 14 to 15 percent? If so, then it is clear that your fund is performing very poorly.
Every mutual fund has its own 'benchmark index', like Nifty 50 or Sensex. It is a scale to measure the performance of the fund. If your fund is failing to beat its own benchmark for two to three years continuously, then understand that there is a big mistake somewhere in the investment strategy. It is too early to draw conclusions based on just one year's investment performance. The true strength and stability of any fund is measured over a long period of 3 and 5 years.
This is how to measure real risk
It is an old truth of the stock market that higher returns often bring with it higher risks. It is not wise to invest money in any fund after seeing its sudden huge rise. You have to see how much risk the fund manager has taken to get that return. There are some technical but very simple scales to measure it:
- Sharpe Ratio: It tells how much income the fund has earned in proportion to the risk. The higher this ratio is, the better the fund is considered.
- Standard Deviation: It shows how much the fund's returns fluctuate. Its decrease is a sign of stability of the fund.
- Beta: It measures the sensitivity of the fund to market movements. If it is more than 1, your fund will fluctuate more than the market, which is a sign of high risk.
'XIRR' is Brahmastra for SIP investors
For investors who invest their hard-earned money every month through Systematic Investment Plan (SIP), estimating returns just by looking at NAV (Net Asset Value) is a wrong way. In SIP, purchases are made every month at different prices and at different times. Therefore, 'XIRR' (Extended Internal Rate of Return) is used here. This formula presents your total real return in percentage by applying precise mathematics of time and different dates of investment.
Along with this, keep a close eye on the fund in which you have invested, which fund manager is in charge of it and in which sectors the portfolio is divided. Frequent change of fund manager can harm the strategy. It is not right to change funds at every small fall in the market, but if your fund has been lagging behind its peers and benchmark for 2-3 years continuously, or is taking unnecessary risks, then exiting that fund and looking for better options is the mark of a wise investor.
Disclaimer: This article is for information only and should not be considered as investment advice in any way. TV9 Bharatvarsha advises its readers and viewers to consult their financial advisors before taking any money-related decisions.
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