Do you also think checking the green uptrends in a mutual fund chart is enough? Let us correct you there before your portfolio dips into losses of red ink. You see, a mutual fund’s profitability depends on several factors known as Performance Parameters. And once you analyse a fund from the lens of these parameters, it’s as good as conducting a 2 Factor Authentication on your fund. But what are these parameters? Let’s find out!
1. Rolling Return
Rolling return is a performance metric that measures the fund’s average annualized return over a specific period. Unlike traditional point-to-point returns, which only measure the fund’s performance at specific times, rolling return provides a more accurate picture of a fund’s performance over time.
Rolling returns show how a fund’s performance changes over different time periods and can help investors evaluate the consistency of a fund’s returns. By looking at a fund’s rolling return, investors can gain insights into its long-term performance and make more informed investment decisions.
2. Sortino Ratio
The Sortino ratio is a performance metric that evaluates a fund’s risk-adjusted returns. Unlike traditional performance metrics that only consider the fund’s total return, the Sortino ratio takes into account the volatility of the fund’s returns.
Specifically, the Sortino ratio measures the fund’s return relative to the downside volatility, which is the volatility associated with negative returns. By focusing on downside volatility, the Sortino ratio provides a more accurate picture of a fund’s risk-adjusted performance. Investors can use the Sortino ratio to compare the risk-adjusted returns of different funds and select the ones that provide the best risk-adjusted returns.
3. Upside capture ratio
The Upside capture ratio is a performance metric that measures a fund’s ability to outperform the benchmark during the periods of positive returns. The upside capture ratio compares the fund’s performance during the periods when the benchmark returns are positive to the benchmark’s overall performance during those periods.
If a fund has an upside capture ratio greater than 100%, it means that the fund outperformed the benchmark during the periods of positive returns. The upside capture ratio can help investors identify funds that perform well when the market is bullish and take advantage of positive market trends.
4. Downside capture ratio
The Downside capture ratio is a performance metric that measures a fund’s ability to limit losses during periods of negative returns. The downside capture ratio compares the fund’s performance during the periods when the benchmark returns are negative to the benchmark’s overall performance during those periods.
If a fund has a downside capture ratio of less than 100%, it means it fund outperformed the benchmark during periods of negative returns. The downside capture ratio can help investors identify funds that perform well when the market is bearish and minimise losses during market downturns.
Choosing the right mutual fund can be a daunting task, especially with the overwhelming number of options available out there. But, you should refrain from taking the easy way out by choosing the first profitable option you see in the list. When you invest your hard earned money in such avenues, it calls for proper research and analysis. And checking these parameters in a fund is no rocket science. Use the mutual fund screener, select the desired fund, add the filter, and you are good to go. Happy Investing!