Fund performance: Qualitative checks


Most retail investors assess performance of their mutual funds by looking at one number – returns. What most investors ignore is the risk that your fund manager took to get you that return.

That is to say “how many sleepless nights did your fund manager give you for getting those returns”. Thus bigger fund performance analyzers would look at “risk adjusted returns” instead of just looking at raw returns. When I mean a fund manager I mean a fund house not the individual who is named as the manager for the scheme that you are evaluating.

However, what is often overlooked are the forces actually driving performance. Some more soft indicators that you should see are

Is the achievement caused by a team performance or by a sole person? Fantastic in theory impossible in real life.

Has the achievement been marred by actually sitting on cash when the market came down? The fund manager in a mutual fund has a buy only mandate. He cannot decide on how much cash to sit on. Such behaviour is dangerous even though it may have yielded results in the past.

Is he true to his label?  Has the fund manager happily given up his mandate of being a large cap fund and bought mid caps to achieve performance?  If yes, that is also worrying.

So go beyond the numbers – see the intention, the growth, the personality of the fund houses. If you do not know how to do it, learn, Ignoring this, is at your own peril. 

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