Features such as return history (performance) and net asset value (NAV) only describe a mutual fund’s existing value and growth, say experts.
A mutual fund may have a promising performance history but that does not guarantee handsome returns in future. This is what regulators and financial planners often stress on. Selection of a mutual fund should be on the basis of many factors, such as financial goals, risk, net asset value and expense ratio. Performance history – or data that determines how much a mutual fund has grown so far – is only one aspect and should not be the only criteria while picking a mutual fund, say experts.
While features such as return history (performance) and net asset value (NAV) only describe a mutual fund’s existing value and growth, an investor can use these as starting points for due research when comparing different funds.
“Although past performance is independent of future returns, it, however, establishes a track record,” said Rahul Agarwal, director, Wealth Discovery/EZ Wealth. Funds with consistent superlative performance in comparison to the markets can be considered to be better managed and do raise confidence in the fund manager’s ability in navigating markets and economic cycles successfully, he added.
How to interpret past performance of a mutual fund
1. Compare over long term: Experts often advise that a mutual fund’s performance history be studied from a longer-term perspective. “Five year and ten-year performance is a good metric to look at…any duration lower than that does not do justice to the fund’s evaluation,” said Mr Agarwal.
2. Compare with benchmark: Another key aspect to look at when analyzing past performance is to evaluate the performance of the fund against a benchmark and its peers.
3. Longevity of the fund manager: In addition to past performance, longevity of the fund manager with mutual fund can also be considered. Let’s say a fund manager chooses to exit a particular fund with strong performance history. In such a case, the future returns may be affected in the short term, experts say.
“In the market there are good funds, which have a sound investment thesis and a professional management. Then there are funds with sound investment idea but less then optimal professional management and this fact is well reflected in the past performance of the fund,” said Mr Agarwal.
How to interpret NAV of a mutual fund
Mutual funds are sold and purchased in units. Net Asset Value or NAV is nothing but the price of one unit of a mutual fund. For example, let’s say someone is looking to invest a sum of Rs. 1,000 in each of two mutual funds: one with an NAV of Rs. 100 and the other with Rs. 200. He or she will be able to purchase 10 units of the first mutual fund and five units of the other. As mandated by market regulator Sebi, funds publish their NAVs after deducting the total expenses on a daily basis. NAV is calculated on a daily basis on all business days when the underlying exchange is open, says Prasanna Pathak, fund manager-equity, Taurus Mutual Fund.
How NAV is calculated
NAV is arrived at in this way: the total value of all the assets in a portfolio, minus all its liabilities divided by the total number of units. Net assets are determined by adding the market value of the fund’s investments into the current assets and deducting current liabilities.
In other words, it means that the percentage return from the same mutual fund can vary depending on the timing of investment.
“Mutual fund returns are subject to market movements which directly leads to changes in the NAV. There can indeed be a difference in returns for an investor buying units at different times depending upon the price of purchase and price of exit/selling,” added Mr Pathak.
That is why it is advisable to observe a mutual fund’s return over a long period, say experts.
