PFRDA

Performance Evaluation

Understanding the risk and return that a portfolio has generated and measuring it against benchmarks helps investors decide whether their money is earning as well as it can and within the limits of risk that they are willing to bear. The performance of a managed portfolio such as a mutual fund will depend upon the following factors:

Factors affecting performance

The investment objective of the portfolio or fund- growth or income
Strategy adopted to manage the portfolio or fund- Active or passive
The investment style adopted by the portfolio or fund manager

Benchmark performance

Apart from evaluating the performance of an asset class, benchmarks are important evaluation parameters based on which investors gauge the performance of managed investment portfolios. The returns from a portfolio have to be validated against the returns from a suitable benchmark to decide whether the returns are adequate.

For example, a 12 percent return from an fund may seem to be strong. But if the returns from the benchmark in the same period is 14 percent, then the fund has fallen short of the goal of an active fund to outdo the benchmark. Investments like mutual funds which invest in a portfolio of securities, will only be able to generate a return that is in line with the asset class in which the fund invests.

Peer group performance

Peer group returns represents other similar portfolios or funds which are also actively managed. In comparing peer group funds following similar strategies and styles of investing, it is good to consider the return as well as the risk of the funds. A fund may outperform its peer funds, but it may have taken significantly higher risks to generate the returns. The level of risk may be unacceptable to some investors.