A mutual fund is a pool of money invested primarily by retail or institutional investors & is professionally managed by the fund managers. The Mutual Fund Performance depends on multiple factors such as the portfolio composition and macroeconomic conditions & these factors will largely determine the extent to which the investor can meet his financial objectives.
Significant factors which determine the Mutual Funds performance are:-
1. Asset Performance and Risk
Equity Mutual Funds are the riskiest while Debt & Gilt Mutual Funds offers less risk to its investors. Investors can invest in either of them or take a balanced approach depending on their risk appetite. Mutual fund performance is affected by the change in the value of its holdings or underlying assets. The asset mix of an investor's investment portfolio determines the overall return. An investor should use the diversification strategy for investing because nobody should keep all his eggs in the same basket. There is a risk-return tradeoff associated with every asset -- the higher the risk, the higher the volatility and return potential. Similarly, lower the risk, lower is the volatility and return potential, For example, stocks are riskier and volatile than bonds, but the ROI of stocks is more than bonds over the long term.
2. Sector Performance
Mutual Funds NAV also depend on the performance of the sector in which the investment is done by the Fund House. Each sector behaves differently under different market & economic conditions. Funds holding foreign stocks will improve when the dollar weakens. Consumer stocks respond to well to a healthy economy where there is a lot of demand for products and services. Energy funds will do well when crude oil prices rise while Bond funds will perform well when interest rates fall and bond prices rise. Index funds simply mirror the performance of market indexes such as the BSE & NSE.
3. Management related Expenses
The return on a mutual fund scheme is the current NAV, minus the management fees and expenses. Every fund house charges fees for management, as well as the marketing and back-office clerical work, needed to keep the fund operating.
4. Fund's Popularity & Cash Flow
A fund's popularity affects its performance. A Popular investment plan in which the investors are piling money, the manager has more opportunity to invest in avenues where he thinks it will achieve the best ROI. If a fund is performing poorly and the market is down the investors will be bailing out. This cash drain will force the manager to sell holdings. An investor should always check the net cash flow when searching for funds before investing.
Macroeconomic factors associated with the economy affect investment's rates of return. A growing economy means more jobs, which means they will spend more & this will lead to an increase in sales, profits, and investments.
On one hand, Rapid economic growth can lead to a higher interest rate which will make credit more expensive, thus dampening consumer spending and business investments. On the other hand, economic slowdowns lead to low employment, lower profits and stock prices resulting in improved bond price. This is how the changing economy affects the investments and it returns.
6. GOVERNMENT POLICY
Fiscal policy, regulations, political stability & arduous regulatory approval process also affects investment rates of return.
If the above points make your head spin then you need a Financial Doctor (Financial Advisor), who is experienced enough to guide your investments. The Advisor will understand your needs, chalk out a proper strategy based on your risk appetite and time horizon & finally will advise some mutual Fund schemes that will fulfill your Financial Goals.