Look at risk adjusted return while measuring MF performance

Arnav PandyaInvestors often face a choice over the manner in which they would consider the performance of their mutual fund scheme. There is an element of confusion that is possible here as there are different ways in which the performance can be seen and this will have different implications for investors in terms of their decision making. It is upto the investor to select the appropriate route as this will help them to make a better decision and there are two distinct ways in which this can be done. It is important to look at each of these routes to see what would be suitable for a particular investor and how they would be able to evaluation the position.Simple returnsOne of the easiest ways to look at the overall position with respect to an investment is to simply consider the returns that the fund has earned in the past. There are various ways within this route to see the returns that have been earned because the selection of the time period can be as per the choice of the investor. The overall condition that is at work here is that the returns are to be taken into the entire process. For example if an investor wants to see how his fund has done during the past 5 years then the appropriate time period should be selected and then this can be considered for the purpose of deciding how the fund is actually doing.  The investor can vary the time period that they choose and this would be dependent upon the manner in which they want to make their decision. The pure return way ensures that there are no complications as far as the overall parameters for the decision are concerned as the only thing that is being looked at is the return that has been earned. The logical behaviour should be to consider a longer time period for the purpose of making the entire process very robust the individual can select periods that are not short like 6 months or 1 year because the longer time period would include both good times as well as tough times so that the real position is revealed properly.  The benefit of this route is its simplicity and that anyone can understand the way the working is undertaken but this might not be suitable for all circumstances.Risk and return consideredThere is another option that is present for the investor and this is to consider risk adjusted returns. The process involves considering the risk that the fund has taken for the purpose of earning a certain rate of return. There are various ways in which this can be done. The logic here is that just the returns are not sufficient for the purpose of making the right decision but it is also important to consider the kind of risk that has been taken for this purpose. Thus too much risk for the earning of slightly higher returns might not be worth it for a lot of people and they need to know the position so that they can decide whether they are willing to lose a specific amount in order to earn something.The benefit of this route is that there is an added element of risk that is added in the equation and this is beneficial to the investor as they know the downside element that is present here too. This helps in making a decision that is more balanced that what is just done when the returns are taken into consideration. The disadvantage is that there can be too much complication present which can confuse the matter for a lay individual and hence make decision making difficult as this might not be done on the right parameters.