Should you track your mutual fund’s performance?

Muneesh has invested in some mutual funds and wants to see his money grow. He scans financial websites and checks NAVs published daily, and tends to get very anxious every time he sees a fall in NAV. The performance numbers published by the mutual fund on the factsheet look very different from the returns he sees online. Are the fact sheet numbers incorrect? He is worried about his investments not performing, and is not sure if he should stay invested.

Muneesh should understand that scheme performance has to be considered in context of the recommended time horizon. Liquid fund returns are measured over shorter time periods and annualised for comparison across products or time periods. However, tracking equity fund NAVs too closely or trying to annualise them can be extremely misleading.

To avoid disappointment due to short-term volatility, the funds must be evaluated over longer horizons of at least three years. Muneesh is tracking the returns daily as he thinks that returns will move upwards in a straight line, which is not true. Factsheet returns, which are declared every month-end based on Sebi guidelines, are the point-to-point returns over past three one-year periods. They may not match the exact holding period for Muneesh or other investors like him. They are standard returns for set time periods, declared based on the assumption that an investor came in at the starting point and got out at the end point.

Muneesh may not only have invested at a different starting point, but may also have added to his investments in the interim. Therefore, his returns would differ based on how much he has invested and when. Muneesh must realise that there is a difference between evaluating a fund and evaluating his own investments. If the objective is to see whether he should stay invested, he should focus on assessing the fund instead of tracking how his money is doing. He should compare the fund’s performance with that of others in its category, at regular intervals, using the standard published data. If its performance is consistently lower than the category average or benchmark index, while most of its competitors fare well, then there might be a strong reason for Muneesh to consider switching his holdings. If his fund is doing fine, however, he will benefit from staying invested over the long term.

(The content on this page is courtesy Centre for Investment Education and Learning ( CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)