There are more than 4000 mutual fund schemes in India but only very few have successfully outperformed the benchmarks. Have you ever thought why only a few perform and others underperform? This blog will help you understand why each and every fund performs differently.
- Portfolio :
Every mutual fund has a portfolio based on its investment objective. The stocks that each fund has in its portfolio will vary based on its research. If at all they have the same funds, the allocation percentage would vary. In every day stock market, the stock perform based on fundamental and technical parameters. Hence change in their value affects the NAV of funds.
For example, let’s take a flexicap mutual fund, say JM flexicap fund has delivered 24.3% returns in 3 years, whereas UTI flexicap fund has provided only 11% during the same period. The main reason is that stocks in the JM flexicap fund’s portfolio have performed better than UTI flexicap fund.
- Expense ratio
Expense ratio is a ratio expressed in a percentage that will be adjusted in NAV for expenses incurred in maintaining the portfolio. AMC with high AUM tend to have lower expense ratio than AMCs with less AUM. The main reason is the fixed cost is always fixed irrespective of the assets that a company manages which has to be shared among all unit holders.
- Portfolio Turnover ratio
Portfolio turnover ratio is a ratio that helps us to know how frequent the portfolio has changed. This is calculated by dividing the total securities purchased or sold (consider the lesser one) by the total AUM. If this number is more than 100 then it means entire portfolio is restructured. More the turnover more the expense as the fund has to pay more brokerage and GST for buying and selling of securities. The churning depends on several factors such as market volatility, macroeconomic situations, news, funds objective and philosophy.
- Fund Manager
Every fund manager is different with their views, knowledge and the way they act to different situation. Hence a buying opportunity for one fund manager might be a selling opportunity for another. Having said that markets are unpredictable, the performance of schemes varies according to the fund manager’s action. If the fund house takes good care of the fund manager the fund manager will reciprocate it through funds’ performance.
- Fund Size
Studies reveal that when AUM grows higher, the performance would decrease, especially when there are restrictions in buying a set of stocks (non-flexible) such as in small cap funds. Mutual funds should have a minimum AUM size to achieve sufficient returns (so that the expense ratio doesn’t exceed enormously the industry average).
At Sid financial services, we do a meticulous research in identifying the best mutual funds that would suit your needs and also actively manage them as per market conditions to ensure your investments grow at a steady pace. Sign up to open your mutual fund account with us today.