How you should compare the performance of any two schemes

A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.

Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.

The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.

How you should compare the performance of any two schemes

When you want to buy a car, how do you prescribe models? First take the latest models or decide on the type of car? If you are still not sure, you visit a dealership and the first question you are asked is what type of car you are looking for, for example SUV, sedan, subcompact?

The same applies to the comparison of the results of mutual funds. You cannot compare the performance of schemas belonging to different categories. Schemes of the same category with similar investment objectives, asset allocation and benchmark must be compared. Just as you can’t compare an SUV to a sedan because of the way both are designed to meet different needs, schemes designed for different investment goals can involve different levels of risk. But when you compare two schemes following the same benchmark it is like comparing the performance of two cars designed with the same engine system. It’s okay to compare two bluechip funds or two small-cap funds, but you shouldn’t compare the performance of a bluechip fund to that of a small-cap fund even if both are equity schemes. Also, within the same category, you should compare performance over the same period just as you shouldn’t compare the mileage of a car in the city with that on a highway.

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