How do I evaluate if a mutual fund is performing well?

Don't judge a fund by last year's returns alone. Evaluate it on consistency, risk-adjusted performance, and how it compares to its benchmark and category peers over 5–10 years.

The Wrong Way to Evaluate a Fund

Most investors pick funds based on last-year's top return list. This is a reliable way to buy yesterday's winner, which often becomes tomorrow's underperformer.

What Actually Matters

1. Returns vs. Benchmark

Every equity fund has a benchmark (e.g., Nifty 50 for large-cap funds). The fund must beat its benchmark consistently over 3, 5, and 10 years — not just one good year.

2. Category Rank

Compare the fund to its peers. A fund in the top quartile of its category for 5+ years is genuinely good.

3. Risk-Adjusted Returns

Sharpe Ratio: Return per unit of risk taken. Higher is better (>1 is good).

Sortino Ratio: Like Sharpe, but only penalises downside volatility.

Standard Deviation: How much the fund's returns swing. Lower = smoother ride.

4. Maximum Drawdown

The largest peak-to-trough fall. A fund that dropped 60% in 2020 while the category dropped 35% is taking excess risk.

5. Expense Ratio

This is the annual fee. For index funds: <0.2% is excellent. For actively managed funds: <1% is reasonable. Every extra 0.5% in fees compounds against you over decades.

6. Fund Manager Tenure

Consistent performance needs a consistent decision-maker. If the star manager left 18 months ago, past performance is less meaningful.

Practical Checklist

[ ] 5-year CAGR beats benchmark by 2%+

[ ] Top quartile in category for 3 and 5 years

[ ] Sharpe ratio > 1

[ ] Expense ratio < 1% (equity) or < 0.5% (debt)

[ ] Fund manager has 3+ years at this fund

> Altius Tip: Value Research Online and Morningstar India offer free fund scorecards. Spend 10 minutes there before any fund decision.