how to analyze mutual funds for better returns key metrics and common mistakes
Mutual funds are a powerful tool for wealth creation, offering diversification and professional management. However, analyzing mutual funds can be challenging, especially with the myths and mistakes that often mislead investors. In this article, we’ll debunk common misconceptions, highlight pitfalls to avoid, and show you how to analyze mutual funds effectively using sharpely, a SEBI-registered investment research platform designed to empower investors with institutional-level tools.
Radhika Gupta, CEO of Edelweiss Mutual Fund, recently shared a critical insight about mutual fund analysis on social media. She pointed out that most platforms focus on discrete point-to-point returns—a metric that can be misleading because a single good or bad year can skew the entire performance history. Instead, she advocates for rolling returns, which provide a more consistent and realistic view of a fund’s performance over time.
This approach helps investors understand the experience of a cohort of investors over multiple periods, rather than relying on a single snapshot. Her push for the right data points highlights the need for better tools and metrics in mutual fund analysis—exactly what sharpely delivers.
At sharpely, we believe that the right tools can make all the difference. Our platform offers advanced analytical tools, curated baskets, and in-depth insights to help you analyse mutual funds the right way. Let’s break down the myths and mistakes in mutual fund analysis and explore how sharpely can guide you to smarter investment decisions.
Many investors believe that mutual fund analysis requires deep financial expertise. The truth is, you don’t need to be a market guru to make informed decisions. Mutual funds are designed for accessibility—fund managers handle the complex task of stock selection and portfolio management. With sharpely, you can simplify the process further. Our platform provides intuitive tools to screen and analyse mutual funds, making it easy for beginners and seasoned investors alike to evaluate funds based on their goals and risk tolerance.
As Radhika Gupta highlighted, relying solely on point-to-point returns (e.g., a fund’s 5-year return from 2020 to 2025) can be misleading. A single outlier year can inflate or deflate the numbers, giving a distorted view of consistency. sharpely addresses this by allowing you to analyse rolling returns, which measure a fund’s performance across overlapping periods. This metric smooths out anomalies and provides a clearer picture of a fund’s reliability, helping you make decisions based on consistency rather than a single snapshot.
On sharpely we share a detailed analysis of the rolling returns for all funds as shown below.
It’s tempting to chase funds with the highest past returns, assuming they’ll continue to perform. However, past performance is not a crystal ball. A fund that delivered stellar returns in a bull market might struggle in a downturn. sharpely helps you look beyond raw returns by offering tools to assess a fund’s strategy, consistency, and alignment with your financial goals. With sharpely, you can dig deeper into risk metrics and portfolio composition to ensure a fund fits your long-term objectives.
Some believe mutual funds are inherently risky and only suitable for seasoned investors. While equity funds carry market risk, mutual funds also offer options like debt funds or hybrid funds for conservative investors. sharpely’s screening tools let you filter funds based on risk levels, ensuring you find options that match your risk appetite. Whether you’re a beginner or a seasoned investor, sharpely makes it easy to build a diversified portfolio with the right balance of risk and reward.
Focusing on a fund’s 1-year return can lead to impulsive decisions. Markets are cyclical, and short-term performance often reflects market conditions rather than the fund’s quality. Even 5-year discrete returns can be misleading if the fund’s category or strategy has changed over time. sharpely encourages a long-term perspective by providing access to rolling returns and historical performance data, helping you evaluate a fund’s consistency over 5 or 10 years.
Some investors overlook the impact of fees on returns. A fund with a high expense ratio that underperforms its benchmark can erode your returns over time. sharpely allows you to compare expense ratios across funds and categories, ensuring you choose cost-efficient options that deliver value. You can also explore low-cost alternatives like ETFs, which sharpely supports through its screening and analysis tools.
It’s tempting to jump into a hot sector like technology or IPOs. However, sector-specific funds can be volatile and risky. sharpely’s in-depth insights let you analyse a fund’s sector allocation and risk profile, helping you decide if it aligns with your portfolio needs.
A fund’s raw returns mean little without context. A 15% return might seem impressive, but if the benchmark (e.g., Nifty 50) returned 18% in the same period, the fund underperformed. sharpely makes it easy to compare a fund’s performance to its benchmark and category average, ensuring you invest in funds that consistently outperform their peers.
Now that we’ve debunked myths and highlighted mistakes, let’s outline a structured approach to analyzing mutual funds using sharpely’s powerful tools.
Before analyzing any fund, clarify your objectives. Are you saving for retirement (long-term), a child’s education (medium-term), or a vacation (short-term)? Your time horizon and risk tolerance will determine whether you should opt for an equity fund (higher risk, higher returns) or a debt fund (lower risk, stable returns). sharpely’s platform lets you filter funds based on your preferences, ensuring you find options that align with your goals.
Rolling returns are a better metric than point-to-point returns, as they measure performance across multiple overlapping periods. sharpely provides access to rolling return data, allowing you to assess a fund’s consistency over 3, 5, or 10 years. For example, you can compare the Edelweiss Flexi Cap Fund (16.22% 3-year rolling return, 15.79% 5-year rolling return) with other flexi-cap funds to gauge its reliability.
Evaluate a fund’s performance relative to its benchmark and category. As shown above, sharpely’s detailed fund reports let you see how a fund stacks up against indices like the Nifty 50 or Nifty 500, as well as its peers. For instance, if the Parag Parikh Flexicap Fund consistently beats its benchmark over 3 and 5 years, it’s a sign of strong management.
Returns are only half the story—risk matters just as much. sharpely provides key risk metrics to help you make informed decisions:
For example, the Nippon Smallcap Fund has a “Very High” risk rating, which you can identify using sharpely’s tools to decide if it suits your risk profile.
A fund’s expense ratio directly impacts your returns. sharpely allows you to compare expense ratios across funds, ensuring you choose cost-efficient options. You can also check the Assets Under Management (AUM) to assess a fund’s scalability. On sharpely, you can easily compare these data points with our comparison tool.
Understanding a fund’s holdings is crucial for assessing diversification and sector exposure. sharpely’s holding analysis tools let you see a fund’s allocations across sectors and stocks.
For instance, the Edelweiss Flexi Cap Fund likely invests across large, mid, and small-cap stocks, offering a balanced approach that you can verify using sharpely.
sharpely stands out as a SEBI-registered investment research platform that empowers investors with institutional-level tools. Our platform offers:
By focusing on consistency over flashiness, sharpely helps you avoid the pitfalls of traditional mutual fund analysis and make decisions that align with your financial goals.
At sharpely, we’re committed to taking this a step further by providing you with the tools to analyze funds the right way. By focusing on rolling returns, comparing against benchmarks, and avoiding common pitfalls like chasing short-term gains or ignoring fees, you can build a portfolio that stands the test of time.
Mutual funds, when analyzed correctly, can be a powerful tool for wealth creation. Break free from myths, steer clear of mistakes, and let sharpely guide you to smarter investment decisions.
So, are you ready to analyse mutual funds the right way? Sign up to sharpely today (if you haven’t already) and start using our advanced tools to evaluate funds based on rolling returns, risk metrics, and more. Take control of your investment journey with sharpely—your partner in building a smarter, more consistent portfolio.
Disclaimer:
Mutual fund names mentioned are for educational purposes only and do not constitute investment advice. Please do your own due diligence before investing.