Investing in mutual funds should ideally be for the long term. However, it is essential to periodically review the performance of the schemes by studying the historical returns of that scheme and comparison with the returns of benchmark/category that the schemes belong to, over the same period of time. If you don’t do this, you may not achieve your earlier planned goals in time. Ideally, this exercise should be conducted every 6-9 months.
Performance of schemes
Historical absolute returns of the scheme (over different periods, say, 6 months, 1, 3 and 5 years) can give a sense of how the scheme has been performing. Returns during various market cycles should be studied as opposed to just comparing point-to-point returns.
The next step would be comparing the scheme’s performance with that of the benchmark and category to which the scheme belongs.
Comparing with category returns will help in understanding if the outperformance (or underperformance) is attributable to the entire category or just the scheme alone or a bit of both.
Assess the risk
The investor should also assess the risk that was undertaken to earn those returns. This can be done using various measures like Sharpe, Treynor Ratios, Standard Deviation (SD), etc. The investor should compare the scheme’s risk along with that of the category average and whether this is in line with his expectations and/or his own risk profile.
Asset allocation changes
Another factor to consider would be asset allocation changes at the investor level that have occurred after the original investments. This can happen since not all asset classes grow or decline at the same rate. The investor should make sure that his current asset allocation is in accordance with the originally intended allocation.
Assessing the macro events pertaining to the sector like regulatory changes, changes in economic conditions should help the investor to estimate the future prospects of the sector/theme to a certain degree.