Comparing mutual funds with these simple key statistics

by | May 22, 2017 | Investment Services

Mutual fund comparison is fairly simple when you understand the key statistics and know how to use them effectively. The key statistics itemized below can help you compare mutual funds easily.Previous data will give you a good idea of the fund’s capability to steadily deliver good returns.

Mutual fund returns

  • Risk-Adjusted Return
  • Arithmetic Mean

Mutual fund risk

  • Beta
  • Standard Deviation

Risk-to-Return

  • Coefficient of Variation
  • Treynor Ratio
  • Sharpe Ratio

These statistics can be readily used online. It is important to note that these key statistics should be used in the order listed. Risk and return should not be used separately for mutual fund comparison. Instead, it needs to be used to measure the risk-of-return to compare mutual funds on a comparative basis. During investment, risk is measured in terms of volatility. Total risk is calculated by measuring the standard deviation of returns and it is this standard deviation that is used to compare mutual funds.

The published annual returns are usually calculated by compounding multi year averages and monthly returns. It is used as the geometric mean for the annual returns that yields a compound return and is the metric, which tells you how good you would have done if you had invested in a fund over the period of interest. Nonetheless, the arithmetic mean is the simple average of the annual means, which is the appropriate metric for calculating a mutual fund’s ability to deliver good returns. This return that is delivered over a period of time will give you a good feel of the fund’s ability to reliably deliver good return. Longer periods should be given more weightage.

Be sure to verify that the returns published by independent sources should be the total returns, which includes (capital gains distribution and dividend) net of expenses and fees. If these key statistics are used effectively, you will surely be satisfied with your selection.

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