How to Evaluate Mutual Fund Performance: Key Metrics and What They Mean?

Mutual funds are one of the easiest ways to grow wealth without managing every stock yourself. But picking a fund is just the first step. Once you invest your money, you need to keep an eye on how it performs over time.  

Is it giving the returns you want?  

Is the risk still worth it?  

These are important questions every investor should ask. 

Did you know? 

According to Morningstar’s U.S. Active/Passive Barometer, only 42% of active investment strategies beat their comparable passive peers by the end of 2024. 

This is why you should always check how well your mutual funds are doing in the market.  

In this guide, we will show you how to evaluate mutual fund performance using key metrics.  

Importance of analyzing mutual fund performance 

Putting your money in mutual funds is not a one-time decision. Just like you check your bank balance or track a delivery – you need to check how your fund is doing. 

Because not every fund that looked great on day one stays that way. 

Sometimes a fund that once gave solid returns starts underperforming. Other times, it might take on more risk than you are comfortable with. Maybe your life goals have changed – but your fund has not kept up. 

If you don’t track performance, you will not know when to switch or stay. 

Here is why you should regularly check how well your mutual funds are performing: 

• It helps you catch poor performing funds early 
• You can make sure your fund still matches your goals 
• You can see if there are better options available 
• It helps you avoid risks you did not notice before 
• You can get the most out of your investment over time 

And guess what? This is how people find the top mutual funds for their portfolio. By analyzing performance you can keep investing in the best mutual funds in the long run. 

Fun fact 

According to the SPIVA U.S. Scorecard, 65% of actively managed large-cap mutual funds underperformed the S&P 500 in 2024. And the longer you stay in an underperforming fund, the more your money loses potential. Regularly reviewing your mutual fund performance helps you avoid that.  

10 metrics to check mutual fund performance 

Here are the important metrics that can help you check your mutual fund’s performance and make better investment decisions.  

1. Historical returns or CAGR  

CAGR = Compounded annual growth rate. 

This metric tells you how much your mutual fund has grown on average each year over a set period. One year returns can be misleading because fund may have a great year and then do badly the next. CAGR gives you a more accurate idea of long-term performance. 

• Example: If you invest AED 10,000 and it grows to AED 17,000 in 5 years, then the 5 year CAGR is around 11.2%. That means your money grew at an average rate of 11.2% every year over those five years. 
• How to use it: Check the 3 year, 5 year, and 10 year CAGR to see how consistently the fund has performed. Most mutual fund platforms show this automatically. 
• Where to find it: Most fund factsheets list CAGR. You can also use a mutual fund calculator to check potential returns over time. 

2. Alpha (Outperformance over the benchmark) 

Alpha shows whether your fund has beaten its benchmark index – like S&P 500 or Nifty 50 – after adjusting for market risk. 

You are paying fees for active management. The fund manager is supposed to pick better stocks than the overall market. Alpha tells you whether they are actually doing that. 

• How to use it: A positive alpha means your fund is doing better than its benchmark. A negative alpha means it is lagging behind. 
• Example: 
  • If your fund gave a 14% return while the benchmark index returned 12%, the alpha is +2%. That is a good sign.  
  • But if the fund returned only 10%, the alpha is –2%, which means it’s underperforming.  
• Where to find it: Look in the performance section of the fund’s factsheet or on sites like Morningstar or Value Research. 

3. Beta (How risky or volatile the fund is) 

Beta measures how much your fund moves in comparison to the market. It is a quick way to know if the fund is more or less volatile than average. Beta helps you decide if the fund suits your risk comfort. 

• How to use it:
  • A beta of 1 means the fund moves in line with the market. 
  • Above 1 means the fund is more volatile than the market. 
  • Below 1 means it is less volatile. 
• Example: 
  • If the market drops 10% and your fund has a beta of 1.2, it could fall around 12%.  
  • If your fund has a beta of 0.7, it may fall only 7%.  
  • Lower beta = more stable. 
• Where to find it: Most fund platforms show this under “risk measures” in the factsheet. 

4. Sharpe ratio (Return vs. risk) 

The Sharpe Ratio shows how much return your fund gives for the amount of risk it takes. It is one of the best ways to compare two mutual funds that offer similar returns but carry different levels of risk. 

The Sharpe Ratio helps you decide if you are being rewarded fairly for the risk you’re taking. 

• How to use it:
  • A higher Sharpe Ratio is better. 
  • A ratio above 1 is generally considered good. 
• Example: Let’s say Fund A and Fund B both returned 10% last year. But Fund A has a Sharpe Ratio of 1.3, while Fund B has a Sharpe of 0.7. That means Fund A gave better returns with less risk. 

5. Standard deviation (Volatility in returns) 

Standard deviation shows how much a fund’s returns move up and down from its average return. In short, it tells you how unpredictable the fund is. 

• How to use it:
  • Lower standard deviation = more stable performance 
  • Higher standard deviation = more volatile and unpredictable 
• Example:
  • Fund X and Fund Y both give around 10% yearly returns. But Fund X has a standard deviation of 5%, while Fund Y has 10%.  
  • That means Fund Y’s returns move more wildly – it could give 20% one year and 0% the next. 

6. Expense ratio (What it costs you to stay invested) 

This is the annual fee charged by the mutual fund for managing your money. It is taken out as a percentage of your total investment. Paying too much for poor performance is a common mistake. 

• How to use it: Compare the expense ratio of similar funds. If two funds offer similar returns, choose the one with the lower expense ratio. 
• Example: If you invest AED 50,000 in a fund with a 2% expense ratio, you are paying AED 1,000 per year – just in fees. If another fund has a 1% ratio, you are paying half as much. 

7. Turnover ratio (How often the fund buys and sells stocks) 

The turnover ratio tells you how often the fund manager changes the fund’s holdings in a year. It is shown as a percentage. A high turnover ratio is okay for some strategies but not ideal for long-term investors looking for stability. 

• How to use it:
  • A turnover ratio below 30–40% usually indicates a buy-and-hold approach 
  • A ratio above 100% means the fund is trading aggressively 
• Example: If a fund has a turnover ratio of 120%, that means it replaced more than its entire portfolio during the year. That could mean higher hidden costs. 

8. Portfolio overlap (Are your funds holding the same stocks?) 

This tells you if different mutual funds in your portfolio are investing in the same companies. Too much overlap means you’re not getting real diversification. 

• How to use it:
  • Compare holdings of multiple funds to see how many stocks are repeated 
  • Try to choose funds with different strategies or sectors 
• Example: Let’s say your large-cap fund and your hybrid fund both have Apple Inc., Microsoft, and Amazon in their top 5 holdings. That is high overlap and could lead to higher losses if those stocks fall. 

9. Fund manager’s track record 

This is the experience and performance history of the person managing your fund. A skilled and experienced fund manager can handle market ups and downs better. If a new or inexperienced manager takes over, performance can change.  

• How to use it:
  • Look at how long the current manager has been handling the fund 
  • Check their past funds and how they performed 
• Example: If a manager has run the fund for 7 years with strong and consistent performance, that is a good sign. But if they joined just last year, past performance might not reflect their skill. 

10. Riskometer (The fund’s risk level) 

The Riskometer is a simple label that tells you how risky the fund is. It ranges from “Low” to “High.” 

This helps you match your fund with your personal risk appetite.  

• How to use it: Choose a fund with a risk level that fits your goals and comfort zone. 
• Example: If you are a conservative investor, look for funds marked “Low” or “Moderately Low.” If you are younger and investing for the long term, “Moderate” or even “High” may work for you. 

How to evaluate mutual fund performance 

Now that you know about the key metrics, let’s take a look at the steps you should follow when actually checking your mutual fund performance.  

1. Know your goal 

Are you investing for the short term or long term? Pick funds that match your time frame and risk appetite. 

2. Compare similar funds only 

Don’t compare a large-cap fund with a small-cap one. Stick to the same category. 

3. Check long-term returns 

Focus on 3-year and 5-year CAGR. Ignore short-term spikes. 

4. Look at benchmark performance 

Check if the fund consistently beats its index. Positive alpha is a good sign. 

5. Assess risk vs reward 

Use Sharpe Ratio, Beta, and Standard Deviation to see if returns justify the risk. 

6. Check costs 

Look at the expense ratio and turnover. Lower costs = more money stays with you. 

7. Scan the portfolio 

Avoid funds with too much overlap or sector bias. 

8. Review the fund manager 

Check how long they have managed the fund and their past performance. 

9. Match the risk label 

Make sure the Riskometer fits your comfort level. 

10. Review regularly 

Check your funds every 6 to 12 months. Switch only if performance slips over time. 

Tools you can use to track all this 

You don’t have to track mutual fund performance manually. These tools make it easy to monitor returns in one place. 

Fund factsheets 

Every fund releases a monthly factsheet with details like – returns, expense ratio, Sharpe ratio, beta, top holdings, and risk level. It is available on the fund house’s website or investment platforms. 

Mutual fund calculators 

These help you estimate future returns using your investment amount and expected CAGR. 

Portfolio tracking apps 

Various apps let you track all your mutual funds in one dashboard. You can also compare performance, check portfolio overlap, and see historical returns. 

Investment platforms 

You can also evaluate funds through mutual funds platform. If you are investing through Standard Chartered, you can invest in mutual funds online and access detailed fund insights directly from your account. 

Helpful tips for UAE investors 

If you are investing in mutual funds from the UAE, keep these few things in mind: 

1. Look for UAE-available funds 

Not all global funds are available to UAE residents. So, only stick to funds listed on regulated platforms like Standard Chartered or licensed advisors. 

2. Choose the right currency 

If your income and expenses are in AED – consider AED-denominated funds or those with currency-hedged options to reduce currency risk. 

3. Consider Shariah-compliant options 

If you are looking for Islamic investments, many mutual funds in UAE follow Shariah principles. These are clearly labelled on investment platforms. 

4. Do not skip the factsheet 

Always read the fund’s factsheet before investing. It tells you everything you need – returns, risks, holdings, and who is managing your money. Here is an example of a fund’s factsheet: 

5. Rebalance as your goals change 

Life changes and your funds should too. Review your portfolio once or twice a year. Switch out of underperforming funds or rebalance when needed. 

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