How Do I Know If a Mutual Fund Is Performing Well

"My fund gave 18% returns last year. Is that good?"

We get this question constantly in our Belong WhatsApp community. And the honest answer surprises most people: we can't tell you if 18% is good without knowing what the benchmark returned.

If your fund delivered 18% while its benchmark (say Nifty 50) delivered 22%, you actually underperformed by 4%.

Your fund manager destroyed value rather than creating it. You'd have been better off in a simple index fund.

This is the core insight most investors miss. A mutual fund's performance isn't about absolute numbers.

It's about relative performance, consistency, and risk-adjusted returns.

This guide covers how to properly evaluate mutual fund performance, the metrics that actually matter, and when underperformance signals you should exit.

The Benchmark: Your Fund's Report Card

Think of a benchmark as your mutual fund's annual report card.

It's the standard, the minimum passing grade, that a fund manager must beat to prove their strategy is adding value.

Every mutual fund is benchmarked against a specific market index.

A large-cap fund investing in India's top 100 companies should be compared to Nifty 100.

A mid-cap fund should be compared to Nifty Midcap 150. Comparing a small-cap fund to Nifty 50 is like comparing apples to oranges.

👉 Tip: Always look for "TRI" (Total Return Index) after the benchmark name. This version includes dividends reinvested, giving you the true performance comparison. SEBI has mandated TRI benchmarks for all fund houses.

Explore fund options through our mutual funds tool.

Step 1: Compare Returns Over Multiple Time Periods

Don't judge a fund by one year's performance. Markets move in cycles, and even excellent fund managers can have bad years.

Review returns across multiple timeframes:

A well-performing mutual fund consistently outperforms its benchmark across most of these periods.

Occasional short-term underperformance happens to even the best managers, but persistent underperformance over 3+ years is a red flag.

Reality check: As of early 2025, data from various reports showed a consistent trend: a significant majority of actively managed equity mutual funds in India fail to beat their benchmarks over the long run.

This is why benchmark comparison matters more than absolute returns.

Step 2: Check Rolling Returns, Not Point-to-Point

Point-to-point returns (like "5-year return") depend heavily on your start and end dates.

If you happened to start measuring from a market bottom, returns look spectacular. From a peak, they look terrible.

Rolling returns solve this problem. They calculate returns for every possible period of a given length, then average them.

Example: A 3-year rolling return calculates the return for every 3-year period: Jan 2020 to Jan 2023, Feb 2020 to Feb 2023, and so on. This gives you hundreds of data points instead of just one.

A fund with consistent rolling returns across market cycles demonstrates genuine skill, not lucky timing.

👉 Tip: Look for funds where 70%+ of rolling return periods beat the benchmark. This indicates the manager adds value consistently, not just occasionally.

Step 3: Understand Risk-Adjusted Returns

Two funds might both deliver 15% returns.

But if Fund A achieved this with wild swings of 30% up and down, while Fund B moved steadily, Fund B is clearly better. Risk-adjusted metrics capture this.

Alpha: The excess return generated above the benchmark after adjusting for risk. Positive alpha means the fund manager is adding value. Negative alpha means they're destroying it.

Sharpe Ratio: Measures return per unit of risk taken. Higher is better. A Sharpe ratio above 1 is generally considered good.

Standard Deviation: Measures volatility. Lower values indicate stable returns. A fund with 25% standard deviation swings more wildly than one with 15%.

Beta: Measures sensitivity to market movements. Beta of 1 means the fund moves exactly with the market. Beta of 1.2 means it moves 20% more than the market in either direction.

Compare risk metrics using our NRI FD rates tool to see how mutual funds stack against safer alternatives.

Step 4: Compare Against Category Peers

Beyond the benchmark, compare your fund against similar funds in the same category. This tells you if your specific fund is doing well or if you'd be better off with a competitor.

If your large-cap fund ranks in the bottom 25% of all large-cap funds over 3 years, that's concerning even if it beat its benchmark.

The category comparison reveals whether your fund manager is skilled relative to peers.

Most financial portals rank funds within categories. Look for funds consistently in the top 25-50% of their category across multiple time periods.

The Expense Ratio Factor

The expense ratio is the annual fee for managing that is collected by the fund. This fee directly reduces your returns.

Example: A fund earning 12% gross returns with a 2% expense ratio gives you 10% net. The same fund with a 0.5% expense ratio gives you 11.5%. Over 20 years, this 1.5% difference compounds to lakhs.

A fund with higher expense ratio must deliver proportionally higher returns to justify the cost. If an actively managed fund with 2% expense ratio barely matches its benchmark, you're paying for nothing. An index fund would serve you better.

👉 Tip: Always invest in direct plans rather than regular plans. The expense ratio difference of 1%+ annually compounds significantly over time.

Learn more in our guide on how to choose mutual funds.

Fund Manager Track Record Matters

A fund manager's skills directly impact returns. Evaluate:

Experience: How long has the manager been running this fund? New managers need time to prove themselves.

Consistency: Has performance changed significantly after a manager change? A fund's past returns under a different manager don't predict future performance.

Other funds: How have other funds managed by the same person performed?

A stable and experienced management team often instills confidence. Frequent manager changes can disrupt investment strategy and performance.

Signs Your Fund Is Underperforming

Watch for these warning signals:

Consistent benchmark underperformance: Missing the benchmark for 3+ consecutive years suggests structural problems, not bad luck.

Falling category rank: Moving from top quartile to bottom quartile over time indicates declining competitiveness.

Style drift: The fund claims to be large-cap but holds significant mid-cap or small-cap stocks to chase returns. This changes your risk profile without consent.

High portfolio turnover: Excessive buying and selling increases costs and suggests the manager lacks conviction.

Declining AUM: If sophisticated investors are exiting, ask why.

When Should You Actually Exit?

Not every underperformance warrants exit. Here's how to decide:

Exit if:

• Underperformance persists for 3+ consecutive years

• Fund manager changed and new manager has weak track record

• Fund's strategy fundamentally changed from what you bought

• Better alternatives consistently available in the same category

Don't exit if:

• It's just one bad year during unusual market conditions

• The fund's investment style is temporarily out of favor

• You'd be crystallizing short-term losses

👉 Tip: Review your mutual fund performance at least once every 6-12 months. Major life changes, market fluctuations, or fund manager changes may require more frequent reviews.

Understand exit strategies in our guide on mutual fund redemption.

Where to Check Mutual Fund Performance

You don't need paid tools. Free resources work fine:

AMC websites: Fund houses update NAVs daily and publish returns across time periods with benchmark comparisons.

AMFI website: The Association of Mutual Funds in India has multi-year performance information for all schemes.

Financial portals: Platforms like Value Research, Morningstar India, and MoneyControl offer detailed performance analysis, category rankings, and risk metrics.

Scheme documents: Factsheets, Key Information Memorandums (KIMs), and monthly reports contain detailed performance data.

Track market movements with Gift Nifty and explore fund options through our GIFT City mutual funds tool.

The Index Fund Alternative

If most active funds fail to beat benchmarks, why not just buy the benchmark?

Index funds do exactly this. They replicate an index like Nifty 50 at minimal cost (0.1-0.5% expense ratio). No fund manager trying to outsmart the market. No underperformance risk.

For investors who find performance evaluation tedious, index funds offer a simple solution: guaranteed benchmark-matching returns at low cost.

This doesn't mean active funds are worthless. Skilled managers do exist and can generate alpha. But identifying them requires the performance analysis we've discussed.

Compare options in our guide on index funds vs actively managed funds.

NRI-Specific Considerations

For NRIs evaluating fund performance, additional factors matter:

Currency-adjusted returns: Your fund might show 15% in INR, but if the rupee depreciated 4% against AED, your real return in dirhams is closer to 11%.

Tax efficiency: Post-tax returns matter more than pre-tax. Equity funds with 12.5% LTCG are more tax-efficient than debt funds taxed at slab rates.

Repatriation ease: Performance means nothing if you can't get your money out. Ensure your fund allows smooth repatriation through NRE accounts.

DTAA benefits: Factor in treaty benefits when calculating effective returns. UAE residents pay tax only in India.

Understand tax implications in our guide on mutual fund taxation for NRIs.

Common Mistakes When Evaluating Performance

Chasing last year's winner: The top-performing fund last year often underperforms the next. Mean reversion is real.

Ignoring risk: A fund that delivered 25% by taking excessive risk will eventually crash. Check standard deviation and beta.

Wrong benchmark comparison: Never compare a small-cap fund to Nifty 50. Use the correct benchmark for the fund's category.

Too frequent evaluation: Checking performance weekly or monthly leads to emotional decisions. Annual or semi-annual review is sufficient.

Ignoring expense ratio: A high-expense fund must significantly outperform to justify costs. Factor in fees when comparing.

Explore allocation strategies through our GIFT City Alternative Investment Funds tool.

A Simple 5-Point Checklist

Before deciding if your fund is performing well, run through this checklist:

1. Benchmark comparison: Has it beaten the TRI benchmark over 3 and 5 years?

2. Category rank: Is it in the top 50% of its category?

3. Risk-adjusted returns: Is alpha positive? Sharpe ratio above 1?

4. Expense ratio: Is it competitive for its category?

5. Consistency: Are rolling returns stable across market cycles?

If your fund passes 4 out of 5 checks, it's likely performing well. If it fails 3 or more, investigate further or consider switching.

Key Takeaways

Judging mutual fund performance requires more than looking at absolute returns. The 18% return that looks impressive might actually be underperformance if the benchmark delivered 22%.

Always compare against the correct benchmark (with TRI), review multiple time periods, check risk-adjusted metrics like alpha and Sharpe ratio, and compare against category peers. Expense ratios directly eat into returns, so factor them in.

Exit only when underperformance persists for 3+ years, not after one bad quarter. Most active funds underperform their benchmarks over time, making index funds a viable alternative for those who don't want to monitor performance actively.

Thousands of NRIs discuss fund performance and selection strategies in our WhatsApp community. Join them for practical insights on building a high-performing portfolio.

Ready to invest in well-performing funds? The Belong app helps you explore mutual fund options, compare NRI FD rates, and track your investments with performance benchmarks.