Mutual Fund: Do you know what is the scale to measure the performance of a mutual fund?

If you invest in mutual funds or are interested in it, then this question must have arisen in your mind too. The question is what is the most important aspect while analyzing the performance of any mutual fund? Experts say that what is measured in this is how much return a scheme has given in different periods.

What is the most important thing?

Mutual fund experts say that the most important thing in this is what are the main measures of rolling returns over several time frames. This tells us the stability of the fund. For example, a fund's 5-year rolling return over 10-15 years can be used to measure the average medium, minimum, and maximum returns, the proportion of time frames in which it outperforms its benchmark, etc.

What is a rolling return?

Rolling return, also known as rolling period return, is a method used to evaluate the performance of an investment over a given period over different periods. Instead of evaluating a fund's performance over only a certain period (such as one year or three years), rolling returns allow you to examine how an investment has performed over multiple, periods. This provides a more comprehensive and flexible view of a fund's historical performance. The key parameters here are the Sharpe, Sortino, and Treynor ratios. Some other important measures are Jensen's alpha and the up/down capture ratio.

What is the Sharpe Ratio

The Sharpe ratio is used to measure risk-adjusted returns. This ratio measures how much return the fund has generated compared to the risk involved in it. If the fund's Sharpe ratio is high, it indicates that the fund is generating more returns with less risk. This is a good thing and indicates good management of the fund. The higher this ratio, the better the risk-adjusted return.

What is the Sortino Ratio

The Sortino Ratio is a part of the Sharpe Ratio, which takes into account only the downside risk. It shows how the fund has performed when the market is falling. This gives the investor an idea of ​​whether the fund can protect the capital in adverse market conditions. Here too, the performance of the fund is the best and much higher than the category average.

What is the Trainer Ratio

Trainer Ratio is also known as Reward to Volatility Ratio. The Trainer Ratio compares the performance of the fund with the risk it takes behind each unit. It shows whether the fund can earn returns according to the risk it is taking. A high ratio indicates that the fund is generating more returns than the risk it is taking. On the other hand, its low is not considered good for the performance of the fund. For example, ICICI Prudential Multi-Asset Fund has a Treynor ratio of 2.72, which is much higher than the category average of 1.68.

What is up/down capture
The next key parameter is up/down capture. The upside capture ratio of a fund indicates how much its NAV rises compared to the benchmark during a rally. The downside capture ratio indicates how the scheme's NAV falls compared to the benchmark. Hence, an up/down capture ratio greater than one indicates that the fund performs well during rallies and falls less during corrections.

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