Mutual funds are a preferred investment avenue for investors seeking capital appreciation and wealth-creation. However, the performance of mutual funds does not remain constant throughout the investment duration. As an investor, you should understand the factors that affect a mutual fund’s performance to invest better. In this article, we highlight the various factors that affect the performance of mutual funds in your portfolio and impact your overall returns.

When investing in mutual funds, you should consider the following factors that can impact the performance of the mutual funds in your portfolio:
 

Performance of underlying securities

Mutual funds invest in a range of asset classes like stocks, bonds, gold, and money market instruments. This asset allocation has an impact on the fund’s performance. In simple words, if the underlying assets of a mutual fund scheme perform well, the fund’s value appreciates, resulting in higher returns for investors. However, if the underlying assets perform poorly, the fund offers poor returns. Performance of the underlying assets may be impacted by various factors like changes in the structure of the companies, interest rate fluctuations, etc.
 

Fund manager’s managerial skills

Another important factor that affects the performance of mutual funds is the performance of the fund manager. Each mutual fund scheme is overseen and managed by an experienced fund manager. The fund manager is responsible for managing the asset allocation of the fund depending on its investment objective. Therefore, the performance of any mutual fund scheme is closely interlinked to how well its fund manager can handle the fund. As the market changes, fund managers must regularly assess and analyse their portfolio to make required corrections. A skilled fund manager can navigate complex market fluctuations and still manage to protect the investor’s corpus.
 

Sector/industry-specific shifts

Sector-specific shifts can significantly affect the performance of mutual fund investments as funds often invest in securities belonging to particular sectors. Changes in regulatory policies, technological advancements, and economic trends can impact the growth prospects of a particular sector. For instance, if the government tightens privacy policies pertaining to the technology industry, funds that invest heavily in tech stocks may experience a decline in returns. However, in the event of a favourable trend like launching of a novel technology can boost the performance of the same fund. As an investor, you should be aware of such factors that affect the performance of mutual funds and thereby, your total returns.
 

Also read: What Is Compound Annual Growth Rate (CAGR)

Fund size

While this factor is often overlooked, fund size is indeed a crucial factor that affects the performance of mutual funds. As the fund’s size grows, the fund manager’s responsibilities also grow. Larger funds are often more difficult to manage and consequently have limited agility when it comes to responding to market opportunities. The logic is simple: when the fund grows beyond a certain threshold, managing large volumes of assets efficiently becomes challenging. This can potentially impact your returns.
 

Cash flows of the fund

The cash flow of a mutual fund can also influence its performance. Cash inflows happen when investors want to invest in the fund, while outflows happen when investors want to redeem their investment and exit the scheme. Large inflows offer fund managers more capital to invest, while large outflows force them to sell assets to meet the redemption requests. Often, fund managers may have to sell assets at unfavourable prices to meet the heightened redemption demand, affecting the performance of the mutual fund.
 

Expense ratio

Expense ratio is the annual fees charged by the AMC to manage your investment. This fee covers the fund’s management expenses, administrative charges, and operational costs. A high expense ratio directly lowers your total returns from the investment as more of the fund’s profits are directed towards meeting these expenses. Alternatively, a lower expense ratio boosts the fund’s return potential. Therefore, you should carefully evaluate this factor before selecting a mutual fund.

• Performance of underlying assets in the scheme and the performance of the fund manager impacts mutual fund returns.
  

• Sector-specific shifts affect mutual fund performance.

• Fund size, expense ratio, and cash flow of the fund influence the returns from the fund.

In a nutshell, multiple factors affect the performance of mutual fund investments. From the performance of underlying securities, sector-specific shifts, and fund size to the fund manager’s expertise and expense ratio, a number of factors can influence your total returns from the investment. Understanding the factors that affect the performance of mutual funds helps you make informed choices that align with your financial goals and risk tolerance.
 

With knowledge of factors affecting the performance of mutual funds, you can start investing in them via the Bajaj Finserv Mutual Fund Platform. On this platform, you can use the Mutual Fund Calculator tool to estimate returns prior to investing. Additionally, you can comparing mutual funds and start SIP investments with a nominal contribution of Rs. 100/month.