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6 Reasons why you should review your mutual fund portfolio periodically

Jul 12, 2016 by Advisorkhoj Research Team | 111 Downloaded
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When one talks about investments especially equity with a long-term horizon, it does not mean that once the investment is done the investor should forget about it for the next few years. Though it is the fund manager’s job to make sure that the fund outperforms the market, it is also in the interest of the investors who may like to know if the fund manager is doing so and also how the funds selected by the investors are aligned with the performance of the peer group.

Like other things, you must have planned your mutual fund investments with your mutual fund advisor in order to meet your specific financial goals, therefore, a review will examine if things are going as per that plan and if some corrective action needs to be taken.

Financial Goals keep changing

Everyone has personal goals in their lives; these goals keep changing with time. As an example, you are 30 years old, married with no children. So you plan to purchase for yourself a single bedroom house by the age of 35. However, by the time you get the house, you have kids. After few years you feel that the one bed room flat is not sufficient as the kids are now growing, so you will need a bigger house when they go to school and so on. Therefore, you require a two or three bedroom house by the time you are say 40 years old. Now you will have to review your portfolio to meet the renewed goal of having a bigger house.

When your investment portfolio is in accordance with your personal financial goals, then you are in a better position to realize your goals.

In another example, you are 25 years old, unmarried, sit with your financial advisor and plan your long term and short term financial goals such as vacation, buying a two-wheeler, car, purchase of a house property and retirement. When you are 30, you are married and say, a proud parent of two children. Now you might have to plan for your children’s higher education and marriage which was not there in your plan when you were 25 years old.

Such changes in financial goals are natural and require regular rebalancing of your investment portfolio, and prioritization of goals from time to time. When you were 25, vacation every year, purchase of a sports motorbike and to be updated with gadgets were on top priority, however, now that you are married, priorities have changed and purchasing a family car is more important than a sports vehicle.

Change in Fund manager

Fund managers play an important role in the performance of a fund, just as the management plays an important role in transforming a company. As in the case of a company if there is a change in the management, one has to review the stock selection, similarly, in the case of a change in fund manager of a mutual fund, you may feel the need to review your portfolio after getting to know the outlook of the new fund manager on the fund. Though AMCs keep the investors informed whenever these changes take place, as an informed investor you should also keep a watch on this.

Change in fund manager does not mean that the fund performance will suddenly change for good or bad. We believe that more than the fund manager, the system and fund management process of an AMC is important. A Fund Manager follows the process set by the AMC and brings in his skill sets and conviction about his stock picks which again is a result of the process. But one should be aware of this change because the new fund manager might invest in new set of stocks based on his research and outlook about the fund.

Remember, at any fund house, your need to remain invested in the schemes selected for a sufficient period of time, based on the objective of the scheme and your investment plans in order to get the desired returns.

Rebalancing the portfolio due to change in market conditions

Change in market conditions might be one of the probable reasons for investors to rebalance their mutual fund portfolio. For example - You have planned an asset allocation strategy to achieve your long term financial goals like retirement or your children’s education or buying a house or so on. And to achieve these goals, you have invested in mutual funds.

Now suppose your allocation is 50 percent in equity mutual funds, 40 percent in long term debt funds and 10 percent in liquid funds. If equity mutual funds valuations rise significantly due to rise in markets, your equity portfolio could shift to a higher level than the planned 50 percent. But your goals and investment strategy may remain the same. So it should be a time to rebalance – shifting assets from equity funds into debt funds in such a manner so as to bring the allocation back into line with your targeted asset allocation of 50 percent into equity funds.

Change in the fundamental attributes

Mutual fund objectives are the basic fundamental attributes of a fund. Though the objective of each fund is to generate returns, funds have a mandate to invest in certain asset class and sub classification as per their Scheme Information Documents and SEBI MF Regulations. Based on the market capitalization, equity funds may be classified into large cap funds, mid & small cap funds and diversified or multi cap funds.

Also, based on a combination of asset class they may be classified into balanced fund, monthly income plan (MIP), capital protection oriented funds etc.

Again, based on sector or theme, equity funds can invest into power, banking & finance, FMCG, Pharma or Healthcare etc. sectors. The funds which invest around a theme or sector are called Thematic or Sectoral Funds.

A change in the fundamental attributes of a fund is brought about by the change in asset allocation, investment objectives, etc. which may also change the risks associated with the fund. No change in any fundamental attributes of a fund can be done without obtaining Securities Exchange Board Of India (SEBI’s) prior approval. The investors are informed about the proposed changes in fundamental attributes with a free timeframe, wherein they can choose to exit the fund without any exit load if they do not wish to remain invested in the fund post changes in the fundamental attributes.

Such change in a fund’s fundamental attributes may require the investors to review and rebalance their portfolio from time to time.

Changes in the Government Policies

Government policies, economic and business environment play an important role in performance of the stock market, and thus, the mutual fund industry. For example - Budget announcements by the Government - Any change in the taxation structure in mutual funds may force an investor to re-align his portfolio to optimize his post tax returns.

Another example could be reduction in interest rate by RBI. Interest rates are reviewed by RBI from time to time. In case of reduction in interest rates, the cost of borrowing becomes lower and at the same time, it keeps a check on inflation. The interest rate sensitive sectors like housing, auto, infrastructure etc. benefit from lower cost of borrowing. Savvy Investors whose mutual fund portfolio is not tilted towards these sectors, may like to review and rebalance their portfolio to enjoy the benefits from these changes.

Thus, changes in business environment, budget announcements and industry or sector policies may require review of mutual fund portfolio.

Peer Comparison

A periodic review of your fund’s performance is essential to compare it with the benchmark returns and similar funds in the same category. One could compare their fund’s performance with the initial prediction to check if they have been receiving returns as planned for. In case the fund is under performing, then remedial actions such as redemption, discontinuance of SIP or STP, addition or deletion to the portfolio needs to be undertaken.

Conclusion

Mutual funds are an ideal way to get reasonable returns from equity investments and for long term wealth creation. Mutual Funds are also about long term investments in order to help you achieve your financial goals, whether short term or long term.

Since it becomes important that these are reviews are conducted periodically to help you in evaluating the fund’s performance in line with your financial goals. There may be several ways of reviewing your mutual fund portfolio, and one among those can be seeking advice of the financial advisor with whom you have planned your investments, as will be the right person with whom you should spend some time, understand the progress of the funds and review the same periodically. When in doubt, you may also contact the Asset Management Companies

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

Locate Peerless Mutual Fund Advisors in your city

Advisorkhoj Research Team

Our research team has a combined experience of nearly 40 years in the financial services management and distribution, across the entire spectrum of product classes including mutual funds, insurance, equity broking and loan products. To contact our research leads, please see their contact information below.

Dwaipayan Bose: dwaipayan@advisorkhoj.com
Pradip Chakrabarty: pradip@advisorkhoj.com

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Peerless Funds Management Co Limited (PFMCL), a subsidiary of The Peerless General Finance and Investment Company Limited (PGFI), is the investment manager to the first mutual fund in the eastern region headquartered in Kolkata.

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