Investing in mutual funds has a tumultuous timeline, so it may not be possible to catch every shrink and swell. Investments that delivered substantial results may not work today. Since we need clear indicators of this trend, learning how to analyze mutual funds smartly is a great skill to hone. While your fund manager will give you recommendations, you have to keep track of where your money is invested.
Seeing a steep decline in one of your funds while the others are thriving is not an indication that you should remove it from your portfolio if you look at your fund statement. Understand if other funds in the same category have performed similarly by looking at mutual fund types and categories.
A smart Mutual fund investor would have to plan their investment with a 3 year minimum timeline. However, they should not be complacent since the 1-year return is still important, as it can raise a red flag if the performance is abnormally high compared to its rivals. Unusually strong performance isn’t likely to last and can indicate negative results in the future. Furthermore, an influx of assets into the fund due to its outstanding performance could pose a problem in managing it efficiently. Therefore, it would be wise to not get carried away by one great year and consider longer term prospects instead.
Understand the Economic Cycle
Time periods are indispensable when it comes to assessing which fund is more profitable. That being said, it would be unwise to discard a fund from your portfolio simply because it has had one bad year. Even the most reliable fund managers, who apply the best mutual fund strategies, could experience a below average annual performance. Thus, judging a stock or bond for its lacklustre performance in just one year may be overzealous. Instead, managers should take measured risks in order to go beyond their targets.
Focus on 5 and 10 year milestones
The trends and styles of fund management regularly evolve, alongside mutual fund recommendations. As such, it is important to assess the performance of a mutual fund over an extended period of time that covers various stages of the economic cycle – including both recession and growth timespans – lasting around 5-7 years. This will determine which funds are capable of withstanding financial pressures and fluctuations. If during research into potential mutual fund investments you locate one with a better than average 5-year return rate for its category, be sure to examine it further.
Assign weightage to each fund and measure the performance
In general, mutual fund performance can be viewed for one year, three years, five years and ten years. If you were to assign weightage to the funds in the order of which you would give more emphasis to the 5-year investment, followed by the 10-year investment, then three-year and one-year last.
To make sure you are getting the best mutual fund recommendations, you can factor in periodic returns by assigning a weighting percentage to each time period. Assigning 40% to the 5-year period, 30% to the 10-year period, 20% to the 3-year period and 10% to the 1-year period respectively. Once you multiply these percentages with subsequent returns and average them out, it’ll be easy for you to compare different funds. To make your search more precise, use one of the leading mutual fund research sites and base your selection on 5-year returns. After that you can also take into account other time periods for better accuracy in predictions about future performance.
