So, how does one really determine what hinders or catalyses the performance of the mutual funds? If that’s what you’re wondering, you’ve arrived at the right spot. Let’s get started!
5 Performance Affecting Factors Of Mutual Funds in 2021
Here are the top 5 factors that affect the behaviour/ profitability of a mutual fund. These factors may be kept in mind while picking a mutual fund to invest in:
The Performance of Underlying Securities
While investing in a mutual fund, you are also investing in a basket of securities that are based on the allocation of the asset, defined in the documents of the scheme. This means that if a fund specifies an investment of its investible corpus at 80% in equity-related instruments and equities and the 20% remaining in debt and money market instruments, the manager of the mutual fund ensures to maintain this ratio even when investing.Having said that, as the fund invests in securities, the performance depends on the performance of the securities. In continuation to the example above, if a stock market crashes, then the 80% invested in the fund’s portfolio gets impacted. Nevertheless, when investing in securities, the managers of the mutual fund are capable of diversifying across multiple sectors, geographies, market capitalizations, etc as per the understanding of the economy. Through this, that is if the manager has diversified, then the impact of the securities on the mutual funds can be muted to a great extent.
Changes in The Economy
The changes in the economy are one of the other most essential factors that affect the investments made in the mutual fund in a specific sector or industry/invested in. These changes are in most cases implemented by the government, impacting various sectors in multiple ways. For instance, let’s assume that a policy is bound to change/boost the demand for real estate in a country. This boom would lead to a sudden increase of construction projects that would demand more materials, such as cement, steel, paint, etc. As a result of which, there is an increase in the stock prices of companies that are manufacturing these materials. Simply put, if you invest in a particular sector and there is a boost in the performance, then you’d be able to experience the same. On the other hand, if a policy ends up affecting the sector that you invested in, then the invested companies in the sector and those who associated with it experience a value drop, causing a negative ripple effect on the mutual fund scheme.
Expense Ratio
As one is aware, there are a few expenses and fees that one needs to pay as the fund house manages the investments on our behalf, also known as the expense ratio. This ratio of the mutual fund includes every fee/cost that is needed to manage and run the mutual fund, such as distribution fees, management fees, administration fees, shareholder fees, etc. In most cases, you can expect the mutual-fund expense ratio to range between 0.5 and 3 percent, depending on the range of factors. This factor affects your mutual fund as it could minimize the overall returns.
The Cash Flows
In a mutual fund, the investors with similar financial goals and risk tolerance pool in the amount and invest in different securities. This means, if there is a large number of investors who are looking to invest in a similar kind of mutual fund scheme, then the fund manager will have more investible funds that enable them to widen the range of investments, increasing the chances of good returns. Having said that, if the mutual-fund ends up performing way below the expectations, then the investors may pull out the investment made that causes the fund manager to sell the holdings to manage the request of redemption. This could cause a negative impact on the flow of cash that in return affects the further performance of the fund.
The Size Of The Fund
The fund size also plays an important role when it comes to the performance of a fund. As mentioned above, as a result of the positive cash flow, the performance of the fund is boosted. Therefore, it is important to know that as the size of the fund increases, the fund manager’s responsibilities increase too. In simple words, when the fund happens to grow larger in size, it becomes really difficult for the manager to manage. This means that a poorly managed large fund could drastically affect the performance of the mutual-fund.
To Conclude:
The job of the fund manager is very crucial as they are expected to manage almost all the bits, such as the mutual-fund itself. This is why it is important for a fund manager to ace through a certain skill set to manage the funds to positively impact the same on the mutual-funds. Also, now that you understand the expense ratio, cash flow, fund size, etc, this can help you get a grip over the factors that affect the performance of the mutual-fund and increase an individual’s preparedness. Happy Investing! The Performance of Underlying SecuritiesChanges Of The Economic In A Few SectorsExpense RatioThe cash flowsThe Size Of The Fund
