Performance measures to look at for analysing mutual funds?

Before getting to the performance measures let us highlight two very important points. First point is all MFs are relative return products which means a MF has to be evaluated in comparison with the market or the segment of the market where it is investing. Second point is, there are different types of MF schemes, certain MFs invest in equity markets, certain invest in gold, certain invest in fixed income markets or debt markets. One has to keep these points in mind which means there cannot be a uniform way of evaluating two different funds.

Within that most of the people look at historical performance that a scheme has generated in order to take investment decisions or select the funds. It is a good guidance point, the past performance however if you look at past performance in isolation, that could turn out to be a disaster. It is important to see whatever has been the past of that scheme, whether it is good or bad, has to be compared with the segment of the market where the fund is supposed to invest as well as one also has to see the kind of risks that the fund manager has taken or avoided.

For example if I were to invest in fixed deposit of a nationalised bank, then I would get certain rate of return. But as against that if I invest the same money in a fixed deposit of a nonbanking financial services company then I am likely to get higher rate of return. But all of us know that in order to take that higher return, I have taken a risk, yes there is a possibility that I may not even get my capital back. So that is the credit risk that I have taken. One has to evaluate the performance of the scheme in line with the risks taken or avoided.