Read This Before Investing in Mutual Funds – Balance Returns and Risks Wisely

Before investing, it is important to understand not just the returns but also the quality of returns and the balance of risk. For complete details, read this special report of Dynamite News

New Delhi: Rolling returns are an important measure to understand the performance of a fund. It tells us how stable a fund has been over different time periods. If a fund has given 5-year rolling returns during 10 to 15 years, then it can be assessed what its average return and minimum and maximum returns have been, reports Dynamite News correspondent.

How many times was it able to outperform its benchmark? This makes it clear how consistent returns the fund has given over time. This information is an indication of reliability for the investor.

Risk hidden behind the return

Just looking at the return is not enough, but it is also important to know how much risk was taken to get that return. These ratios are mainly used to measure risk.

1. Sharpe Ratio

It shows how much return the fund gave without much volatility. The higher this ratio, the better the performance is considered.

2. Sortino Ratio

It shows what kind of return the fund has given in loss situations. That is, the profit received after reducing the risk of loss is shown by the Sortino Ratio.

3. Treynor Ratio

It measures how much profit the fund has earned during market volatility.

ICICI Prudential Multi Asset Fund has been the best in all these three major ratios.

• Treynor Ratio: 2.73%

• Sharpe Ratio: 0.63%

• Sortino Ratio: 1.55%

Other important parameters

Jensen's Alpha: It shows how much additional profit the fund has earned compared to its benchmark.

Up/Down Capture Ratio: If this ratio is more than 1, then it is a good sign. It means that the fund rises more during bullish market times and falls less during bearish times.

Growing role of fund of funds

Funds of funds (FoFs) that invest in different sectors and themes are now becoming an attractive option for investors. A thematic fund of funds invests in different sectoral funds and strategically diversifies the portfolio. In the last 5 years, such funds have given 1 to 9 percent higher returns than sectoral indices.

Tax benefits increased popularity

Now only a 12.5% ​​long-term capital gains tax is levied on investments of more than 24 months in these funds, whereas earlier it depended on the income of the investor. This has made these funds more beneficial for long-term investors.