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

Factors Affecting Mutual Fund Performance:

1.

KeyEconomic Factors :

• EconomicInflation Factors:& Interest Rates: (DetailedHigh previouslyinflation -can GDPerode growth,real inflation,returns, while rising interest rates,rates employment,can etc.)negatively impact debt funds.
• CompanyGDP Performance:Growth & Economic Cycles: (DetailedStrong previouslyeconomic -growth Financialgenerally health,benefits profitability,equity growth,funds, creditworthiness)while downturns may favor defensive sectors or debt funds.
• MarketGovernment Sentiment:Policies & Regulations: Changes in tax laws, monetary policies, and industry regulations impact investment returns.

2. Company Performance (DetailedFor previouslyEquity-Oriented -Funds)

Investor
psychology,
• The marketfinancial mood)health, revenue growth, and profitability of companies in a fund's portfolio directly impact returns.
• Sectoral performance matters—e.g., tech funds perform well when the tech industry is booming.

3. Market Sentiment

• Investor confidence, global economic trends, and geopolitical events influence stock and bond markets.
• Market volatility can cause short-term fluctuations in fund performance.

4. Fund Manager Expertise:Expertise

(Detailed
previously
• A -skilled Stock/bondfund selection,manager assetcan allocation,identify riskgrowth opportunities, manage risks, and time market cycles effectively.
• Active management skills)plays a crucial role in beating benchmarks.

5. Expense Ratio (TER): (Detailed previouslyTER - ImpactTotal ofExpense Ratio)

• Higher TER onreduces net returns)returns since it includes management fees, administrative expenses, and distribution costs.
• Investors should compare TER across similar funds to ensure cost-efficiency.

6. Investment Objective and Strategy:Strategy

• The fund’s goal (Detailedgrowth, previouslyincome, -balanced) Strategydetermines executionasset vs.allocation objective)and risk levels.
• Aggressive equity funds focus on capital appreciation, while debt funds prioritize stability.

7. Fund Manager's Expertise & Active Management:Management

• Active Funds: TheRely skill of theon fund manager in active management is crucial. Active management aimsmanagers to outperformpick thestocks/bonds benchmarkfor throughhigher stockreturns.
selection
• andPassive Funds (Index Funds, ETFs): Track market timing.
indices
with lower costs but limited outperformance potential.

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.