4 Key Metrics to Evaluate Indian Mutual Funds

Looking to invest in Indian mutual funds from NZ? Here's what you need to check before putting your money in:

Quick Facts:

• Indian mutual funds hit record USD4.2 billion inflows in May 2024

• NZ investors can access funds through Indus

• Direct plans have lower fees than regular plans

For NZ Investors:

• Under NZ$50,000: Regular income tax applies

• Over NZ$50,000: FIF rules kick in

• Watch currency risk between NZD-INR

Here's the deal: The best fund isn't the one making headlines. Pick funds matching YOUR timeline and risk comfort, with solid 5-year returns and reasonable fees. Let's break down exactly what to look for.

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Why Track Fund Performance

Tracking fund performance is like having a GPS for your money. It shows you where your investments are going and helps you make better decisions.

Here's what tracking does for you:

The Indian mutual fund market is packed with options. SEBI made things clearer in February 2018 by switching to Total Return Indices (TRI) from Price Return Indices (PRI). Now you get the whole story of how a fund performs.

Watch These Numbers:

SEBI sets these rules for fund comparisons:

• Equity funds? Compare with Sensex or Nifty

• Short debt funds? Use 1-year T-Bill

• Long debt funds? Look at 10-year Government securities

Here's the deal: Just because a fund did well before doesn't mean it'll keep winning. Markets move. Fund returns change. That's why you need to keep an eye on these numbers.

If you're an NZ investor using Indus, you can track Indian mutual funds right from your phone. It includes a dashboard for your investments.

Think of fund tracking like checking your bank balance - do it often, know where you stand, and act when needed. That's how you stay ahead in the investment game.

Fund Returns: Short and Long Term

Different time periods need different fund types:

Understanding Returns

Here's what each return number means:

Let's make this super clear:

Put ₹15,000 (c. NZD300) monthly into a fund. Keep at it for 15 years. Get 15% returns (CAGR). That's the "15_15_15 rule" - showing how time and returns build wealth.

What Matters Most

• Look at both 3-year AND 5-year returns

• Match returns with the right index (Sensex/Nifty for stocks)

• Factor in fees and taxes

• Remember: Past performance ≠ future results

For NZ investors on Indus: You can track these numbers across 100s funds. Pick your timeframe and compare.

2. Risk Level: How Much Can You Lose

Let's break down the numbers that show you how much your investment might swing up (or down) in Indian mutual funds.

Here's what different funds look like on the risk meter:

Two numbers tell you everything about risk:

Beta (Market Risk) Beta shows how wild the ride might get compared to the market:

• Beta = 1: Your fund copies the market's moves

• Beta > 1: Your fund makes bigger moves than the market

• Beta < 1: Your fund makes smaller moves than the market

Here's what this means: If NIFTY 50 jumps 1% and your fund has a 1.5 beta, you're up 1.5%. But heads up - when markets drop, you'll drop harder too.

Standard Deviation (SD) SD shows how much your returns might bounce around. Let's say a fund shows:

• Expected return: 15%

• SD: 4

Your actual returns will likely land between:

• Top end: 19% (15% + 4%)

• Bottom end: 11% (15% - 4%)

What to Do With These Numbers:

• Want to play it safe? Pick funds with beta under 1

• Want bigger gains (and can handle bigger drops)? Look at funds with beta above 1

• Check the SD - lower numbers mean less drama in your returns

Bottom line: Don't chase high-risk funds just because they might pay more. Pick something that matches your comfort level.

3. Returns vs Risk: Getting Your Money's Worth

Here's what you need to know about measuring performance in Indian mutual funds:

The Sharpe Ratio Makes Things Clear

The Sharpe Ratio tells you if you're getting enough return for the risk you're taking.

Here's what I mean:

Two funds give you 5% returns over 10 years. Fund A has a Sharpe ratio of 1.40. Fund B has 1.25. Go with Fund A - you're getting more return for each bit of risk you take.

Alpha: Your Fund Manager's Report Card

Let's compare two funds:

See that 3% alpha for Fund B? That means its manager is doing a BETTER job than Fund A's manager at beating the market.

Pick Better Funds

Here's what to do:

• Start with the Sharpe Ratio - bigger numbers = better

• Look for positive alpha - shows your manager knows what they're doing

• Pick funds that match your timeline:

  • Need money soon? Debt funds

  • Investing for years? Think about equity

Know What You're Looking At

Give your fund 18-24 months before making big moves. But if returns stay flat while risk keeps climbing? Time to look elsewhere.

4. Fund Costs: What You Pay

Let's break down the costs of Indian mutual funds.

Two Main Costs You'll Pay

Direct vs Regular Plans: What's Different

Here's What This Means For Your Money

Take a ₹180,000 investment:

• 1.5% expense ratio = ₹2,700 yearly fee

• 2.25% expense ratio = ₹4,050 yearly fee

That's an extra ₹1,350 per year you could save.

How to Pay Less

1. Choose direct plans if you can manage investments yourself

2. Compare fees between similar funds

3. Check exit loads if you need short-term access

4. Look at bigger funds (₹5,000+ cr AUM) for lower fees

Here's the bottom line: A 1% fee difference might look small today. But over 10-20 years? That money could be growing in YOUR account instead of paying fees.

5. Fund Manager Skills: Extra Value Added

Here's how fund managers stack up against the market:

Key Performance Numbers

What Makes a Good Manager?

Alpha tells you if they're beating the market. For example: A fund that returns 17% when the market gives 12.5% (with beta 1.4) has an alpha of 1.1%. That's good.

Beta shows you risk levels:

• Below 1 = Less market swings

• Above 1 = More market swings

The best managers show strong 3-5 year returns across different market conditions.

Watch Out For These Problems

For NZ investors using Indus: Pick managers who've shown solid results for 5+ years in your investment style.

Here's the bottom line: Past results won't tell you everything about future performance. But these numbers help you spot managers who know how to handle both good and bad markets.

Tips for NZ Investors

Here's what you need to know about Indian mutual funds as an NZ investor:

Tax Rules You Need to Follow

How India Taxes Your Investments

Under the Double Taxation Avoidance Agreement (DTAA) between India and New Zealand, certain types of income, such as capital gains from the sale of mutual funds, may be taxable only in the country of residence. This means that if you're a New Zealand resident investing in Indian mutual funds through Indus, you will not be subject to tax in India on those investments.

Dealing with Currency Risk

Smart Moves for New Investors

• Pick large-cap equity funds

• Look at index funds

• Choose funds running 5+ years

• Check your mix every 3 months

Keep an eye on both NZD and INR - a fund up 15% in INR might look different in NZD when currencies shift.

Summary

Here's how to pick Indian mutual funds that work:

Performance Timeline That Matters

What Makes a Bad Fund?

Here's the thing:

The best fund isn't the one with the biggest returns. It's the one that:

• Fits your timeline

• Matches your risk comfort

• Keeps fees in check

• Works in both up AND down markets

Bottom line: Focus on funds that match YOUR needs, not just the ones making headlines.

FAQs

What is the best measure of a mutual fund performance?

The Sharpe ratio is the #1 way to measure how well a fund performs. Here's what it tells you:

Let me break this down with real numbers:

Fund A makes 12% with 10% ups and downs Fund B makes 10% with 7% ups and downs (Let's say the risk-free rate is 3%)

• Fund A's Sharpe: 0.9 (12% - 3%) / 10%

• Fund B's Sharpe: 1.0 (10% - 3%) / 7%

See what happened? Fund B makes less money but it's actually the better choice because it's less risky.

What is the best measure of risk for a mutual fund?

Beta shows you how wild the ride might get compared to the market:

How to evaluate mutual funds in India?

Here are the 5 things you NEED to look at: