The Buyt Desk
To successfully achieve your financial goals, it is significantly important to timely monitor your mutual fund investments. Don’t know how to review the portfolio of your mutual fund schemes? You will get the right solution here.
What’s the Right Time to Monitor Your Mutual Fund Investment?
Well, there is no hard-and-fast rule on when and how frequently you should review your portfolio of mutual fund schemes. Industry experts usually recommend monitoring your portfolio at least one time annually. The main reason for time-bound monitoring is to analyze whether or not the current investments are provided per your expectations. If not, then you must take some corrective actions.
Alongside this time-bound review, you must review your portfolio when some sudden life events or external shocks occur. Here, the life events mean job loss, childbirth, big pay increase, separation from a loved one, getting married, death of a family member, etc. These life events can cause changes in the financial goals and that’s when you would require a review. External shocks or events like the recession, COVID-19 pandemic, and wars can also change the business world and financial market, which again warrants portfolio monitoring.
Things to Check During Mutual Fund Portfolio Review
As per CRISIL reports, large-cap funds lost 1.80%, multi-cap funds gave 8.30% and short-term debt funds returned 5.90% in the last year. So, should you now sell all large-cap holdings and allocate the sale proceeds between multi-cap funds and short-term debt funds? Well, you must not.
Mostly, first-time investors attempt to figure out winners and losers by analyzing past returns. However, the financial planners ask to consider the portfolio as a whole. Family First Capital’s Founder and Managing Director – Rupesh Nagda says “The investor must initially find out whether his portfolio is widening in accordance with the common trend of the financial markets, after factoring in the asset distribution he began with.
Consider your asset allocation. When equity funds outperformance, the equity portion in your portfolio increases sharply, reserve some profits, and purchase the underperforming asset. To earn money from your investments, work on the old wisdom ‘Buy-low-sell-high’.
For example, in an increasing market, gold investments (ETFs (exchange-traded funds) or gold MFs) perform badly. Hence, in that situation, is it good to sell gold and purchase more equity? Its answer is No. Instead, you have to do the opposite i.e. cut equity and book profits rather than selling gold.
Founder and Managing Director of Axiom Financial Services, Deepak Chhabria says that while analyzing mutual fund schemes, figure out how they have worked out against their benchmarks and their peers. He also added that there will be stages of underperformance and investors must avoid taking corrective steps hurriedly.
Rebalance
Rebalance the asset allocation of your portfolio if it has changed. Sell the asset class which has gone up and then invest the proceeds in an under-represented one. A few investors also included more to the under-represented asset class to rebalance the portfolio.
The deviations from potential allocations should be crucial to permit a change. A deviation of over 15% is a perfect beginning. All rebalancing and reconstitutions exercises should be undertaken while considering tax and exit load implications in a way that advantages go beyond the cost, Fisdom, Head-Research, Nirav Karkera says.
Rebalancing also improves sub-segment allocations. For instance, your equity portfolio may have a 70:20:10 allocation to large, mid, and small-cap funds respectively. When the market becomes volatile, allocation to small and mid-cap schemes may fall. You would like to improve it when the deviation is sizeable.
Corrective Actions
While rebalancing the asset allocation, investors can opt for corrective actions like weeding out underperformers and presenting innovative products that show low association with current investments, thereby helping to improve risk-adjusted returns.
Underperformance must be considered in comparison to the benchmark and peers. Also, investors should consider style diversification. This is because sometimes specific investing styles may not function.
For example, value investing didn’t click from 2011-2019. The portfolios emphasizing quality didn’t pay off in the year 2021-2022. Strategies for different investments may work differently. So, maintain style or strategy diversification in your portfolios.
Loading on a specific investment style can affect the portfolio level when goes out of favor. If your equity mutual fund portfolio has comparatively performed more badly over the last two years than broad equity markets, possibly you have a low allocation to small and mid-cap funds and/or a value-emphasized investment strategy.
Don’t sell the scheme instantly during underperformance. Keep holding present units and stop including more till you have sufficient details on hand to take an exit decision, says Chhabria.
Schemes usually underperform when the fund manager changes, the investment premise goes wrong, the style goes out of favor, the investment process change, or the investment premise takes longer to play than expected, and the fund manager doesn’t walk the talk. Decide to exit when underperformance is not temporary.
Remove Leftovers
Usually, people invest in equity schemes via STP (systematic transfer plan). In this plan, a customer invests a lumpsum in a liquid fund and transfer a small and equal amount of money to equity funds. In some cases, when STP is finished and a customer transferred all starting corpus into the equity fund, a few residual units remain in the liquid fund due to an increase in these funds in the meantime.
It’s best to transfer those residual units to the equity fund and close the liquid fund account. Find any legacy investments in your portfolio. For example, age-old investments that you most probably have forgotten. These investments will make your portfolio statement appear full.
Also, assess the important hygiene factors like nominations and updated contact details for portfolio constituents. These factors are compulsory according to the new rules. If required, change the contact details and nominations to easily track and transmit assets.
DIY Investors Need to Work More
According to Chhabria, most investors end up blindly pursuing returns. Studies also reported that investor returns are much lower than scheme returns. DIY (do it yourself) investors need to prevent these biases as they might not have a sounding board as an advisor.
Jeevantika’s Chief Mentor and Co-Founder, Vijai Mantri asks investors to look inward. Rather than asking them the name of prospective winners in mutual fund schemes, they should ask if they’re investing sufficiently for their financial goals, or if they need to change their attitude towards investing.
