Understanding Mutual Fund Performance Analysis: What Really Matters
Ever watched a cricket match and been surprised by the scoreboard? Sometimes, the team with fewer sixes ends up winning. Just like in cricket, mutual fund performance analysis reveals that it's not always the biggest numbers that win, it’s about consistency, risk control, and smart decisions.
Mutual Fund performance analysis isn’t just for finance enthusiasts; it’s essential for anyone who wants to make informed decisions and grow wealth meaningfully. According to AMFI, as of 28th February 2025, there are over 1,600 open-ended mutual fund schemes in India. Choosing the right one requires more than just glancing at past returns, it calls for a deeper understanding of performance metrics, risk factors, and consistency.
Key Metrics in Mutual Fund Performance Analysis
Evaluating a mutual fund isn’t just about looking at the final return. It’s about how those returns were achieved, how consistently they came in, and what level of risk was involved.
Here are the key performance metrics that help decode a fund’s true journey:
- CAGR: How Fast is the Investment Growing?
The compounded Annual Growth Rate (CAGR) shows the average annual growth rate of an investment over a specific time period, assuming the gains are reinvested each year.
- Calendar Year Returns: The Yearly Performance Report
These returns show how a fund performed each calendar year, highlighting consistency and resilience across time. This metric reveals if the fund performs better in bull or bear markets, and whether it’s consistently rewarding or erratic.
- Rolling Returns: Testing Consistency Over Time
Rolling returns capture a fund’s performance across overlapping time frames (e.g., 3-year returns calculated daily or monthly). They help assess how consistent the fund has been across various market cycles. Rolling returns are a better judge of consistency than point-to-point returns, reducing the impact of timing.
- Annualized Volatility: Measuring Return Fluctuations
Volatility measures how much a fund’s returns fluctuate from its average return. Annualized volatility scales this to a yearly figure. Lower volatility means more stable, less nerve-wracking returns.
- Downside Risk: Measuring the Depth of Declines
While volatility captures overall fluctuations, downside risk focuses specifically on negative performance. Metrics under downside risk include:
Top Drawdowns: The largest declines a fund has experienced from peak to trough. Helps assess the fund’s worst-case scenario.
Semi-Deviation: A measure of how much the returns of a portfolio fall below the mean or a fixed threshold, considering only negative observations/returns. Indicates vulnerability to negative returns.
Minimum Rolling Return: Shows the worst return the fund has delivered over a specified rolling period.
Percentage of Negative Rolling Return Observations: The percentage of rolling return observations where the fund delivered negative returns when compared to its benchmark or other portfolio, indicating the fund’s resilience and ability to weather different market conditions.
Together, these metrics provide a clearer picture of the fund’s ability to contain losses and manage market downturns.
- Risk-Adjusted Returns: Are You Getting Compensated for the Risk?
Sometimes, a fund may offer high returns, but only by taking on high risk. Risk-adjusted return metrics like the Sharpe Ratio and Sortino Ratio help assess whether those returns are worth the risk taken.
Sharpe Ratio measures how much excess return a fund generates per unit of total risk (volatility). While, the Sortino Ratio is a more refined version that considers only downside risk, ignoring the ‘good’ volatility from positive returns. Both ratios help investors identify funds that not only perform well but also do so efficiently and with controlled risk.
Mutual Fund Performance Analysis in Practice
Metric | Fund A (Benchmark Nifty 500 TRI) | Fund B (Benchmark Nifty 50 TRI) |
CAGR | 12.80% | 12.42% |
Annualized Volatility | 10.20% | 8.90% |
Top Drawdown | -18.00% | -15.00% |
Semi-Deviation | 6.80% | 5.30% |
3-Year Rolling Return – Mean | 11.90% | 11.10% |
3-Year Rolling Return – Median | 12.20% | 10.80% |
3-Year Rolling Return – Max | 16.00% | 14.30% |
3-Year Rolling Return – Min | 6.50% | 4.10% |
3-Year Rolling Return – % Negative | 5.00% | 12.00% |
Sharpe Ratio | 0.95 | 1.10 |
Sortino Ratio | 1.30 | 1.45 |
The CAGR calculation is as per AMFI Circular 135/BP/ 109-A /2023-24 dated September 10, 2024. The above is only for illustration purposes and should not be construed as indicative return of offering of NJ Asset Management Private Limited.
Fund A edges ahead in terms of higher long-term growth (CAGR), better average and median rolling returns, and fewer periods of negative performance. It also shows a higher minimum rolling return, suggesting better downside protection during turbulent phases. This makes it an appealing option for investors seeking consistent long-term wealth creation.
Fund B, however, offers a smoother investment ride. It has lower volatility, shallower top drawdowns, and better downside risk metrics like semi-deviation and negative rolling return%, along with stronger Sharpe and Sortino ratios. This means that for every unit of risk taken, Fund B delivers more efficient returns, especially when accounting for downside risk.
So, while Fund A shines in growth and returns consistency, Fund B stands out for its risk-adjusted efficiency and defensive strength, which may suit conservative or risk-aware investors better.
Beyond Numbers: Other Metrics to Consider
Performance metrics are important, but they don’t tell the full story. When choosing a mutual fund, it's just as crucial to look beyond the numbers and understand the context behind them.
Here are key factors to consider:
- Investment Strategy of Fund House: A transparent, well-defined, and process-driven investment strategy and investment process reflects discipline and clarity in decision-making an essential trait for long-term success.
- Portfolio Turnover Ratio: This tells you how frequently a fund changes its holdings. A high turnover may lead to higher costs and could suggest a lack of long-term conviction in the holdings.
- Portfolio Overlap: If multiple funds in your portfolio hold similar stocks, you may not be as diversified as you think, leading to concentration risks. Checking overlap ensures your investments are actually diversified, helping reduce overall portfolio volatility.
Why invest in NJ Mutual Fund?
NJ Mutual Fund process is built on a foundation of 100% rule-based investing, which eliminates emotional and behavioural biases. Our focus is on quality stocks, filtered through rigorous value, low volatility, momentum, and forensic and governance checks, aiming for consistency and long-term wealth creation. NJ Mutual Fund schemes come with a high active share and low overlap compared to its peers providing a genuine diversification option. To know more, please reach out to your mutual fund distributor, today.
Conclusion
Each performance metric tells a different part of the story: returns, risk, stability, and drawdowns. But relying solely on numbers is like reading just one chapter of a book. A wise investment decision requires the investor to consider the full picture which includes peer performance, risk, economic context, and long-term record as well, before making a choice.
Choose smart. Choose comprehensively!
FAQs
1) How to analyse mutual fund performance?
To analyse mutual funds, evaluate metrics like CAGR, rolling returns, volatility, and risk-adjusted ratios. Also compare with benchmarks, peer funds, and long-term consistency for a holistic view.
2) What is the 3-5-10 rule for mutual funds?
The 3-5-10 rule suggests a minimum horizon of 3 years, encourages staying invested for at least 5 years, and ideally recommends holding for 10 years or more to truly benefit from long-term compounding and ride out market volatility.
3) How to Track Mutual Funds for Analysis?
Mutual funds can be tracked through factsheets, AMC websites, or trusted investment platforms to regularly monitor the fund’s performance and ensure it stays aligned with investment goals.
Investors are requested to take advice from their financial/ tax advisor before making an investment decision.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
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