Risks are involved in every venture, and this is applicable to the mutual funds as well. Before investing in a mutual fund, you should be aware of the risk and returns associated with it. How can you do so? Here, we have listed certain factors associated with evaluating risks and returns of the mutual fund.
The following information is derived from the historical performance of the mutual funds. When you analyze previous statistics, you can estimate the future performance by performing mathematical calculations. Although this is not an exact measure, it can provide an estimate of the performance.
What are the Risks in Mutual Fund Investments?
- Market Risks – The value of the mutual funds is driven by the market happenings. Hence, mutual funds are subjected to market risks. High volatility carries higher risk with it. Market risk should be analyzed before proceeding with the investment.
- Currency Risks – If you are investing in offshore instruments, currency risks come into play. With the depreciation of one currency with respect to another, you can either gain or lose thereturn on your investment. Although you cannot predict the exact risk, you can derive an estimate. For example, if Rupee is depreciated against US Dollar, you will earn ahigher return if you invested in a US fund.
- Industry Risks – Similar to market risks, but it is concerned specifically with an industry. If the particular industry witnesses a downfall, the stock prices will go down and vice versa. To prevent this, you should analyze the latest happenings in the industry.
- Interest Risk – The interest rates are always changing and thus, it may affect the valuation of the equity and debt instruments. But, the effect is temporary and it may get better with time.
- Country Risks – A lot of happenings in a country may affect your investment. For example, if there is a political unrest or any natural calamity, it will negatively affect your investment. If there is a new policy promoting growth in the industry, your investment may witness higher return.
You can analyze the potential of investing in mutual funds by using any mutual fund calculator, for which I highly recommend this website.
Parameters to Evaluate Mutual Fund Return
- Risk-Adjusted Returns –Analyzing the risks associated with the mutual funds in the past and analyzing the percentage of returns associated with it, we can determine the most appropriate funds for investment. If the return percentage is same over a certain period of time, the particular mutual fund has a higher Risk Adjusted Return.
- Benchmarks – There are certain standard industry measurements that can be used to determine the potential of a mutual fund investment. BSE Sensex and CNX Nifty are the major benchmark indices in Indian stock market.
- Fund Manager Capabilities – Since trading will be done by a fund manager, it is necessary to peek into the capabilities of the manager. A successful fund manager should have a great track record. Moreover, decision-making skills are equally important.
- Quality of Stocks – Before investing in mutual funds, determine the quality aspect of the stocks. The historical performance, rate of return, stock management, etc are some of the factors determining thequality of stocks.