In recent times, choosing a mutual fund has become quite a complex affair. Though there are ample of funds in the market to choose from, all vying for attention in their ways, this has actually invited all the more confusion. The most significant factor if you want to compare mutual funds is to analyze the returns. To understand in simple terms, a return that a fund gives over a given period is the percentage difference between the initial Net Asset Value and the ending Net Asset Value. The main purpose of calculating returns is to make a comparison, so that you do not end up investing in the wrong funds.
For example, absolute returns give a measure of how much a fund has gained over a certain period of time. However, one has to be careful so as not to end up comparing the wrong funds by using this parameter. If you are looking at the returns of a diversified equity fund, it has to be compared with other diversified equity funds only, and not with a sector fund or a balanced fund. It is also important to note that a fund’s benchmark is an index that is chosen by a fund company to serve as a standard for its returns. It has been made mandatory for funds to declare a benchmark index.
Also, choosing an appropriate time period is the most crucial thing when measuring or comparing returns. The time period over which returns are to be compared and evaluated should be the same over which that fund type is meant to be invested in. You should also analyze carefully whether a fund’s return history is long enough for it to have witnessed diverse market conditions. There are factors besides returns which make a difference, but since it is the most instrumental one, it plays a key role before you choose to invest in a particular mutual fund.
