Looking beyond past performance



There are different ways in which mutual funds can be evaluated while providing guidance to mutual fund investors. One of the most common ways of doing this is to look at the past performance and then make a selection about the funds to be included in the portfolio. However, in making a proper decision there is a lot more that needs to be considered while evaluating the various options. Here is a framework for such an effort. Past and future

One of the issues faced by people looking at just performance for decision making is the fact that this represents the past and something that has already happened. The worth of the advice that is given is dependent upon the performance that will be witnessed in the future and hence these represent two different areas. The past has already played out and it is very difficult for this to be repeated continuously and this is the reason why it is unlikely that the best performers of the past one year (which is the common time period considered for the exercise) will be the best performers in the period going ahead.

Action Point

Efforts should be made by distributors to go beyond past performance and other reference points need to be developed in making the decision making process more robust.


All this calls for the development of a framework that takes into consideration several factors in addition to just the performance of the period gone by. This is essential because it will help in building an overall structure whereby the decision is made on several parameters and hence this would turn out to be robust in its implementation.

Action Point

When an alternative is devised it would be necessary to look at multiple factors rather than just a single one so that this has a better chance of success.

Fund manager

One has to look at the fund manager who is managing the funds and his experience. More than just the specific fund performance, it makes sense to look at how the fund manager has been managing the funds over a period of time. This is essential to know the kind of selection of assets that the fund manager has been making and how they have played out. No fund manager will have a good record under all circumstances but a look at the performance over a longer time period shows how tough times are managed. His tenure with various funds and fund houses also becomes important because in an actively managed fund the investment decisions taken by a fund manager and his team have a significant impact on the returns generated.

Action Point

The fund manager is a main player in ensuring the performance of the fund so his track record has to be scrutinized carefully.

Fund characteristics

Apart from the fund manager it is the fund that is actually going to end up earning returns for the client. This is the reason why the distributor needs to be familiar with the fund and how it is achieving these objectives. When different funds offer similar features present for selection it is important to be more discerning. Even when the fund objectives are the same there can be a large difference in terms of the risk taken to generate returns by various funds. The size of the fund impacts the selection of the holdings while the inflows and outflows also impact the behavior of the fund.

Action Point

The objective of the fund and the risk return equation will differ among funds. Some of the features to watch out for are high inflows or outflows as these can impact the performance of the fund.


The portfolio of the fund has a significant impact on the return generated by the investor. The distributor cannot be expected to be an expert on the manner of investing but a look at the portfolio has to be taken to see that there are no factors which are an obvious sign of danger. This would mean things like a very high exposure to a particular company or a sector or even large holdings in unknown and unlisted firms and hence this would need to be taken into consideration because it would raise the risk level in the investment. The manner and the system in which a fund house goes about constructing the portfolio is also important as is having a defined investment process and system. This ensures continuity in the manner in which the assets are selected and lessens the impact in case of a change in the fund manager.

Action Point

The portfolio should not have a high element of risk and this has to be scrutinized to see that there is potential for the investment. Presence of a defined investment process is helpful in tackling change of fund managers.

Arnav Pandya is a well known Financial Planner, Trainer & Columnist.

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