Apart from market gains and management skills of the fund manager being the obvious factors affecting the performance of a mutual fund, there are several other factors which determine the same.
A mutual fund is an investment portfolio which is professionally managed by a fund manager or fund house. Mutual funds are best known for portfolio diversification as they consist of a mixture of bonds, stocks, and other securities. Such diversification also spreads the risk across the investment making it almost negligible in the long run. There are various other factors affecting the performance of mutual funds, here are a few of them;
INVESTMENT PERFORMANCE AND RISK: The share price and market performance are directly proportional to each other. The change in the value of funds happens as and when any kind of change happens in the market. Because of diversification, the portfolio risk is spread across a number of securities making it lesser volatile as compared to the other direct investments like stock making it less risky. Although the returns from mutual funds are not as high as from the stock investments, the risks are not as high as investing in stocks directly.
SECTOR PERFORMANCE: Sector performance is another important factor determining the performance of any mutual fund. If the sector is performing well, so will the stocks of your funds. For instance, since there is a lot of construction happening infrastructurally across the nation, the price of raw material like cement, iron etc. are bound to go up due to increased demand. Hence the share price of them will also shoot up. So for the people who have invested in cement companies will enjoy greater returns. Similar is the case for all other raw material providing companies.
EXPENSE RATIO AND MANAGEMENT FEES: Management fees and expense ratio are two costs which directly affect your returns or gains. The gain you earn on any particular fund is total gain minus management expenses and fees (profit earned= total gain- expenses-management fees). According to a study conducted by the New York Times, the fund houses charge 1.44 percent on an average per year.
CASH FLOWS: More investors mean more money, in such scenario when there are plenty of investors investing in a particular stock, it gives the fund manager an opportunity to further diversify the portfolio and invest in larger quantities of funds which provide better returns. The cash flows from investors hence determine the performance of the fund as well as a fund manager. In tough times when the fund is performing badly, most of the investors pull back their investment, the manager is bound to sell off the holdings decreasing the overall cash flow.
FUND SIZE: The next factor influencing the performance of a fund is its size. The larger the fund size, the more skills it requires. Just like any other responsibility, increasing the fund size would mean increasing the responsibility and onus on the fund against its investors. The size of a fund has a finite limit beyond which it will become difficult to be handled. A poorly managed large fund is not a good choice to make with your hard-earned money. Once this limit of the fund is reached and the fund house has reached its saturation, it may call it a ‘Soft closure’ which means no more investments would be taken against that particular fund.
Now it becomes the responsibility of the investor to read the details carefully regarding the funds they wish to invest in. A poorly managed large fund is not a good choice to make.
Stay logical, stay invested!