Many Indians today invest in mutual funds hoping to grow their money faster than traditional savings. But experts say that most investors look only at returns and ignore the health of the fund itself.
They focus on the number showing how much profit they’ve made, without understanding the factors behind those returns.
Financial experts believe that this habit can lead to poor investment choices and unnecessary risks. To make the most of mutual funds, investors must look beyond returns and study how a fund performs, how long it has been consistent, and how efficiently it manages risk.
Abhishek Kumar, Sebi-registered investment adviser and founder of Sahaj Money, said that most investors rely only on absolute returns while judging a mutual fund’s performance.
“Calculating absolute returns is a simple way of showing the gain or loss made from an investment. However, it doesn’t consider investment duration as a factor while calculating returns, hence making it an incomplete measure for judging a mutual fund’s performance,” he said.
He explained that two investors could see similar profits in rupee terms but over different time periods. Without considering the duration, one could be missing a far better-performing fund.
To address this, Kumar suggested using XIRR — or Extended Internal Rate of Return, which reflects annualised returns in cases where there are multiple investments and withdrawals.
“XIRR helps in calculating annualised investment return when there are multiple investments and withdrawals at irregular intervals, as is common with SIPs. As it reflects the real-world timing and cash flows, XIRR provides a more precise calculation of an investor’s actual gains from a mutual fund,” he explained.
XIRR takes into account every purchase and redemption, offering a fair view of the real return achieved by the investor, especially for those investing through systematic investment plans (SIPs).
According to Kumar, investors must go beyond returns and assess the overall health of a fund. “Apart from XIRR, mutual fund investors should also examine risk ratios such as standard deviation and Sharpe ratio, fund manager track record, portfolio details, expense ratio, consistency of performance, and asset allocation,” he said.
“These factors help them assess not just the returns, but also the stability of it,” he added. A fund that delivers steady returns with lower risk is often healthier than one that gives big profits one year and heavy losses the next.
Trivesh D, Chief Operating Officer at Tradejini, said that many retail investors get carried away by numbers without checking what’s behind them. “A mutual fund may look attractive when it delivers high returns, but it’s important to see how efficiently those returns were generated. Understanding whether the fund outperformed its benchmark, and at what level of risk, is key,” he said.
He added that investors often overlook the performance consistency of fund managers and the type of companies the fund invests in. “Blindly chasing high returns without understanding the fund’s structure can lead to disappointment later,” he warned.
Kumar said another common mistake was relying too much on online ratings. “Many MF investors make the common mistake of investing based on star ratings provided by many portals. The methodology chosen to create the star rating is opaque most of the time and might lead to wrong selection,” he said.
He advised that while ratings can be used as a starting point, investors should always look deeper into a fund’s portfolio and track record. “Also, many mutual fund investors focus only on short-term returns while ignoring costs like expense ratio and exit loads,” he added.
Experts say investors should always measure a fund’s performance against its benchmark index — such as the Nifty 50 or Sensex — and with other funds in the same category. “Investors can review their fund’s performance by comparing returns against chosen benchmarks and similar peer funds within the same category by going through the fund house website,” Kumar said.
This helps them understand whether the fund’s returns are truly impressive or simply in line with market trends. “Benchmark comparisons also reveal whether the fund manager is adding real value or just tracking the market,” said Trivesh.
While mutual funds are meant for long-term wealth building, experts agree that regular performance reviews are essential. “Long-term investors should review their fund’s performance at least annually. They should compare it against benchmark and peer group returns,” Kumar said.
He added that investors should decide to stay invested, switch, or exit a fund based on consistent underperformance, change in their risk appetite, or shift in financial goals. “Such decisions should not be based on short-term performance or market noise,” he advised.
Trivesh agreed, adding that long-term patience combined with disciplined review gives the best results. “A fund should ideally be reviewed after two years. If it continues to underperform for three or four review cycles, it might be time to switch. But the decision should be data-driven, not emotional,” he said.
Both experts agreed that successful mutual fund investing is not about chasing the highest returns but staying invested in quality funds that perform steadily over time. “The nature of investing should be disciplined and patient. The goal is not to beat the market every month but to achieve stable wealth growth over years,” said Trivesh.
Kumar summed it up by saying that understanding a fund’s risk profile, return consistency, and manager strategy matters much more than chasing last year’s best performer.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)