Two funds may show different past results, yet the larger number alone cannot tell you which one suits you. They might invest in different assets, take different risks or have been measured over different periods. To compare mutual funds meaningfully, begin with the job you want the money to do.
A goal date, the amount you may need and your comfort with changes in value give the comparison a purpose. From there, you can look at what each fund holds, how its past results were measured and what it costs.
Start with your goal
Think about when you may need the money. An expense due in a year calls for a different discussion from a goal many years away. If the fund’s value falls shortly before your payment is due, you may have little time to adjust your plan.
Also consider how much uncertainty you can accept along the way. A longer period may give you more room to respond to market changes, but it cannot guarantee a recovery. When you invest in mutual funds, the scheme should be suitable for both your goal date and your ability to tolerate changes in value.
Compare funds with similar purposes
A fund that invests mainly in company shares and one that holds mostly debt securities are built for different purposes. Their results should not be treated as if they came from the same conditions. You could start by reading each scheme’s investment objective, category and permitted asset allocation.
Then look at the portfolio. Two funds in the same category may hold different securities or give different weights to the same sectors. If you already own a fund, check whether another one would add different holdings or largely repeat what you have.
The scheme name is only a starting point. Its current holdings show what it owned on a particular date, while the investment approach explains how the manager may select holdings over time.
Put past results on the same footing
To compare mutual funds by past results, use the same start and end dates. A three-year figure for one fund and a five-year figure for another answer different questions. Check whether the figures refer to the same type of plan and whether any distributions have been included.
The figures shown are for illustrative purpose only
A single annualised figure can also hide the journey between those dates. One fund may have experienced larger changes in value even if its end result resembles another’s. Looking at more than one period can provide context, although none of those periods establishes your potential return.
Past performance may or may not be sustained in future
A benchmark can add another point of reference when you review a fund’s history. Compare the fund with a benchmark relevant to its stated investment approach, over matching dates. The comparison describes a selected past period, not what the fund will do next.
Read risk alongside the result
Risk is more than the possibility of a lower end value. It also includes how much a fund’s value may fluctuate while you hold it and how difficult it could be to sell its underlying holdings in unsettled conditions. Different assets and portfolios can bring different kinds of uncertainty.
A scheme’s risk indicator gives a quick view of its assessed risk level. Read it with the portfolio and scheme documents rather than treating it as a guarantee about future changes. If two funds show similar past figures, their risk levels and holdings may still differ.
Consider what a decline would mean for your goal. Would you be able to keep the money invested, or would you need to withdraw it at that time?
Check costs and practical terms
Expense ratios are charged to a scheme and affect the value investors receive. Compare the current expense ratio for the plan you are considering, rather than assuming every plan of a fund costs the same. Costs do not tell you which fund will deliver a higher potential return.
Also read any exit load and other applicable terms. An exit load may apply if you redeem within a specified period. The details can matter if your goal date changes or you need the money earlier than expected.
Bring the comparison together
You need not choose a fund by ranking every past percentage. A short list of questions can keep the decision grounded: Does the investment objective fit your goal? Can you accept the possible changes in value? What does the portfolio hold, and what costs apply?
When you compare mutual funds this way, a higher past figure becomes one piece of information rather than the whole answer. If you decide to invest in mutual funds, keep reviewing the scheme and your goal as your circumstances change. Suitability depends on your plan, not on a number taken from one period.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
