How to Assess the Performance of Your International Funds
1. Review the Fund's Objective
The first step is to look at the fund's objective. Each international mutual fund has its investment objective and strategy. Some funds aim to achieve high growth, while others focus on income, and some aim to strike a balance between the two. It is essential to check whether the fund's objective aligns with your investment goals. For instance, if you are an income-oriented investor, investing in a high-growth international fund may not be the best-suited option for you.
2. Analyze Returns
Historical returns are a crucial indicator of the fund's performance. When assessing returns, it is essential to look at both long-term and short-term performance to get a complete perspective. The fund's one-year, three-year, and five-year returns should be checked to assess the consistency of its performance. Besides, the fund's returns should be compared with benchmark returns to evaluate the fund's alpha. The alpha measures the fund's excess returns over the benchmark returns. Suppose the fund has consistently outperformed its benchmark return over an extended period. In that case, it indicates that the fund is managed effectively and could be an excellent investment option.
3. Study Expense Ratios
Expense ratios are the total costs incurred by the fund to manage its investments. These expenses could be in the form of marketing costs, management fees, and other charges. A high expense ratio could eat away at the fund's returns, hampering your overall investment gains. Therefore, one must check the expense ratio of the fund before investing. The lower the expense ratio, the higher the returns for the investor.
4. Assess Risk
Risk is an integral part of any investment, and it is no different for international funds. International funds face various types of risks, including currency risk, inflation risk, geopolitical risk, and market risk. It is crucial to evaluate the fund's risk against its returns to determine whether it is worth investing in. A useful metric to calculate risk is the Sharpe ratio. The Sharpe ratio indicates the fund's returns adjusted for the risk taken. A high Sharpe ratio indicates that the fund has generated better returns for the risk incurred.
5. Evaluate Fund Management
The fund manager plays a critical role in driving the fund's performance. A competent and experienced fund manager can guide the fund to generate better returns. It is also essential to check whether the manager's investment philosophy aligns with your investment goals. Investors should research the fund manager's track record, including his/her performance in managing other funds. An effective manager should generate above-average returns consistently.
6. Look for Consistency
Consistency is key when evaluating the performance of your international fund. A fund that generates high returns for a year or two is not necessarily an excellent investment option unless it performs consistently. Consistent returns over the long-term demonstrate the fund's management's expertise in managing the fund's investments effectively. Therefore, it is crucial to assess the fund's performance over a more extended period.
Conclusion
Evaluating the performance of international funds is critical to making informed investment decisions. It is essential to conduct thorough research and analysis to determine whether a fund aligns with your investment goals. Investors should assess the fund's objective, analyze returns, study expense ratios, evaluate risk, assess fund management, and look for consistency when evaluating performance. Above all, remember that investing in international funds requires a long-term perspective, and investors should stay invested for a more extended period to realize gains.