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Factors that affect mutual fund performance-Drivers of Returns and Risk in mutual fund Scheme

Factors Affecting Mutual Fund Performance:

  • Key Factors :
    • Economic Factors: (Detailed previously - GDP growth, inflation, interest rates, employment, etc.)
    • Company Performance: (Detailed previously - Financial health, profitability, growth, creditworthiness)
    • Market Sentiment: (Detailed previously - Investor psychology, market mood)
    • Fund Manager Expertise: (Detailed previously - Stock/bond selection, asset allocation, risk management skills)
    • Expense Ratio (TER): (Detailed previously - Impact of TER on net returns)
    • Investment Objective and Strategy: (Detailed previously - Strategy execution vs. objective)
    • Fund Manager's Expertise & Active Management: The skill of the fund manager in active management is crucial. Active management aims to outperform the benchmark through stock selection and market timing.

Drivers of Returns and Risk in Mutual Fund Schemes

  • Returns are driven by:

    • Asset Allocation: The mix of asset classes (equity, debt, gold, etc.) in a portfolio is a primary driver of long-term returns. Equity generally offers higher potential returns but comes with higher volatility.
    • Security Selection: Within each asset class, the specific securities chosen by the fund manager (stocks, bonds) significantly impact returns.
    • Market Movements: Overall market trends (bull or bear markets) have a major influence on fund performance.
    • Active Management (if applicable): Skillful active management can potentially generate returns above the benchmark.

  • Risk is driven by:

    • Asset Class Volatility: Equity is generally more volatile than debt. The proportion of equity in a scheme significantly impacts overall risk.
    • Market Volatility: Periods of high market volatility increase risk across most asset classes.
    • Credit Quality (for Debt Funds): Lower credit quality bonds carry higher credit risk.
    • Interest Rate Sensitivity (for Debt Funds): Funds with longer duration are more sensitive to interest rate changes.
    • Concentration Risk: Lack of diversification (e.g., sector funds, thematic funds) increases risk.
    • Expense Ratio: While TER doesn't drive market risk, it certainly impacts the net return and therefore the risk-adjusted return for the investor.
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