Conducting a thorough performance review of any fund is an integral component of investing. Analyzing metrics like risk-adjusted returns, fees and peer comparisons can help you understand whether a particular investment fits into your portfolio or not.

Performance evaluation may seem straightforward – higher is always better – but for an accurate representation, additional metrics must also be examined.

Benchmarks

Additionally to analyzing historical returns of funds, it’s crucial to assess their performance against an appropriate benchmark. A benchmark should match up well with their investment strategy and be unambiguous and transparent – including including securities which can be purchased easily on the market by passive investors – with daily pricing and calculation to provide consistent data.

Evaluation of a fund’s relative performance against its benchmark can give insight into the amount of risk it is taking in pursuit of returns, and whether these risks have paid off over time. Tools like Sharpe and Sortino ratio can provide information about risk-adjusted returns while downside capture ratio gives an indication of its ability to safeguard capital in bear markets.

Considerations should also be given to how taxes impact returns from long-term investments, specifically after-tax returns can help compare performance more closely, while inflationary influences could prove helpful when making investment decisions.

Risk

When considering investments, it’s essential to assess both returns and risks when analyzing them. Investment returns alone cannot tell us much about whether a fund fits with our portfolio or can help us meet our goals.

Risk scores provide insight into a fund’s volatility relative to those of its Morningstar category peers, providing clarity as to the proportion of higher returns which come from more prudent investments versus increased risks taken by it.

Treynor measure offers an all-encompassing approach to measuring risk, taking into account both systematic and unsystematic elements of risk. Unfortunately, however, this only applies to diversified portfolios; other considerations like expenses or taxes will not be taken into account.

Assessments should also focus on the management team and tenure. A strong management team that meets fund’s stated objectives can reduce risk while increasing returns, while changes in managers or consistent underperformance versus benchmarks may indicate the need for review.

Liquidity

Liquidity should always be an important consideration when investing, whether in private equity funds or mutual funds. A higher liquidity ratio indicates that assets in your portfolio can easily be converted to cash while more illiquid investments could take longer to convert to liquid investments.

Analysing a fund’s performance over various time periods (one, three, five or all five since inception) will allow you to assess its relative performance relative to its benchmark and peers and see whether or not it meets your investment goals.

Make sure to review a fund’s yield. While high yields can attract investors, it’s essential that investors evaluate its dividend policy and distributions. Certain funds offer special dividends or fluctuating yields which make comparing with similar funds difficult; calculate after-tax yield to get an idea of its true yields. Also check for any bond funds with credit quality/interest rate sensitivity boxes as these could affect volatility levels.

Fees

Along with past performance, you should also carefully evaluate the cost of investing. Ideally, find funds with lower fees that will enable you to maximize returns over time.

Fund fees are reflected in their rate of return; therefore, the lower their fee, the more of your money will go directly toward investing in returns for you.

Examine a fund’s management team carefully. Examining managers’ backgrounds and track records are important aspects to keeping in mind when assessing a fund; look for someone with relevant experience within its industry as well as one who possesses the capability to execute its strategy successfully.

The Analyzer provides a list of funds in order of their annual operating expenses, ranking the selected fund against those within its product type and share class. Clicking “Read More” allows you to learn more about each expense ratio as well as its variations over time; unfortunately this analysis does not include advisor or flat fees charged directly against investors’ accounts.

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