Financial statement analysis is a very important tool in selecting a proper mutual fund. There are several things that have to be kept in mind while looking at a financial statement analysis of mutual funds.
Mutual fund analysis includes qualitative as well as quantitative analysis where quantitative analysis is about the background and experience of the mutual fund company, whereas quantitative analysis is about factors such as performance and style of the manager, risk adjusted performance etc.
One of the most important things in the analysis of a mutual fund is benchmarking. This is what enables us to evaluate the historical performance and based on such benchmarks we can also identify funds that may give a higher return. By using a wrong benchmark one may end up selecting a wrong mutual fund. Also, now days it is not difficult to do correct benchmarking as there are some software also available to do this.
Apart from benchmarking, end point bias may also be of great importance. But unfortunately the most common mistakes that are made are the recent performance of the fund is what is taken into consideration. Once there is a good performance in recent times, there is an illusion that the performance of the fund is very consistent and has been outperforming. However one needs to look at the returns for one, three, five, and seven years so that the performance of the mutual fund is properly evaluated and that is how the actual performance of the mutual fund may be obtained.
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