5 Key Determinants of Mutual Fund Performance

Over the years, mutual funds have turned into one of the most popular ways of investing money, helping investors diversify their portfolio without directly investing in stocks or debt instruments. However, it is important to measure the fund's performance before investing or while reviewing your portfolio.Let's have a look at five key factors that influence a fund's performance.

Also known as the liquidity ratio, it is the ratio of total cash held by the fund to its total asset holdings. A high liquidity ratio means fund managers are in a better position to make investment decisions. Moreover, it also means the fund manager does not have to liquidate a fund's holdings if the market enters a bearish phase.

AUM or Assets Under Management represents the total value of assets held by a fund. A high AUM may indicate a fund's success; however, this determinant must be matched with other factors to make investment decisions. A high AUM could mean a lesser expense ratio for a debt fund, translating into better returns for the investors.

A fund's performance depends largely on how well it can perform compared to its benchmark index. An alpha of higher than 0 indicates that the fund has been able to outperform the benchmark index in terms of returns. In contrast, Beta shows the level of volatility in the fund in comparison to its benchmark index.

The expense ratio and other management costs determine your gains per year. An expense ratio of, say, 2% a year implies that 2% of the fund's capital will be used to cater to the fund's cost, such as fees of the manager, administrative costs, and others. So the net amount of dividend or capital appreciation that you receive comes after deducting the investment cost.

The performance of a particular sector or industry could impact the fund's performance as well. For instance, if a mutual fund is invested heavily in the automobile sector, any changes in the sector could determine the fund's overall performance.

While mutual funds are known to perform better in the long-run, it is essential to monitor them regularly. Some of the determinants of mutual fund performance mentioned above will help you review your portfolio and adjust accordingly, if needed.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.