Step 1: Find out whether the scheme matches one’s investment objective. It is important that the scheme’s philosophy matches your investment philosophy. For instance, if your investment style is conservative, the fund manager’s investment approach should be conservative or vice versa. Or, if you prefer to invest in growth stocks, your ideal choice would be investing in equity growth funds.
Step 2: After identifying a fund compare the same with its peers or relevant benchmark. For example if your equity fund (index) has given a return of 20% find out how much Sensex has given in the same period. Also compare this fund’s performance with other similar equity funds investing in similar companies.
It is very important to find out the right category of the fund. For example if the fund invests only in mid caps, its right benchmark will be BSE Mid Caps and right peers will be funds that also invest only in mid caps and NOT those which invest in large caps or small caps.
Step 3: Moreover, analyze the performance of fund over a longer period of time i.e. how much return the fund gave in the last 5-yr, 1-yr and 3-months. Simply do not go by its performance in the last 1 month or the last 3 months. Prepare a small table (given below) to analyze the historical returns. These data are publicly available and does not require much effort to collect.
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