What Factors Affect Mutual Funds’ Performance?

Who doesn’t want to know what makes mutual funds tick? How come some mutual funds make all the returns? What goes into creating a five-star fund?

Mutual Fund investing is not as simple as it looks. A lot is going on in the background. This determines fund performance. In this blog post, we look at five crucial factors that affect mutual fund performance.

Investment Mandate

When comparing performance, it is important to first review the investment mandate. Every Mutual Fund Scheme has a specific investment mandate and investment objective. This is what differentiates one mutual fund from another. The mandate typically defines the universe of securities for a scheme. Securities include stocks, bonds, deposits, funds, etc.

Mutual Fund Manager

Another key factor is the fund manager. A fund manager selects securities within the defined universe. They research markets for investment ideas. They may make directional calls based on their findings. Fund managers may also follow specific styles of investing. Value investing, momentum investing, etc. are some styles.

Financial Markets & The Economy

Financial markets and the economy are linked to investment performance. A variety of factors outside of asset prices influence how your mutual funds perform. This includes GDP growth, oil prices, FII and DII flows, geopolitics, currency exchange rates, inflation, etc.

Investor Sentiment

Behavioural science shows us that we less rational than we assume. So, our investment decisions are driven by emotions. If sentiment is unnecessarily sour towards a particular fund – it may fare better in the long-run. Similarly, undue optimism may result in mediocre returns.

Mutual Fund Valuation

Warren Buffet once said, “Price is what you pay, value is what you get.” When you buy at a low price you get better value. And when you overpay, you get lesser value. When you buy a mutual fund (equity, debt, gold, etc.) at a great price, long-term fund performance will be better.

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