In Advisorkhoj, we often get asked by investors, how often should they review their mutual fund investments? Some financial advisors say that, the investors who made investments and then forgot about it were the ones, who got some of the highest returns. There is partial truth in this because in equity mutual funds best returns come over very long investment horizon through the power of compounding.
However in Advisorkhoj, we do not advocate this approach because we have seen many investors holding on to underperforming funds for long periods of time. There is a danger of falling short of your goals, if parts of your portfolio have been underperforming for a long time and you come to know about it when you are approaching the goal timeline. In our view, you should have a review process in place so that you know if you are making satisfactory progress towards your goals and take corrective actions if required.
The question is how often should you review? There is no “one size fits all” answer to this question.
5 key considerations in deciding review frequency
Financial goals: Advisorkhoj is a big advocate of goal based investing. Very often, investors have goals in mind but there is no structured financial planning for these goals. If you have investments without assigned goals, it is never too late to assign goals to each of your investments. Longer term goals require less frequent monitoring because you have time on your side to take corrective actions, if required. For longer goals, annual reviews should be sufficient. Shorter term goals require more frequent monitoring because time is not on your side and therefore, corrective actions, if any, need to be taken as quickly as possible. For short term goals, you may need to have quarterly reviews.
Nature of investments: Equity as an asset class is intrinsically volatile – short term performance in equity can, therefore, be misleading. Also in diversified equity funds, the fund manager has an extremely important role to play in delivering returns to the investor relative to the market. The investment thesis of a fund manager may require a few years to play out, depending on market conditions. Therefore a longer time-frame, usually 2 – 3 years, is required to judge the performance of equity funds.
Performance of debt funds, on the other hand, is dependent on the interest rate / bond yield scenario and fund manager’s strategies. Financial planners usually advise investors to select debt funds based on their goals, but some investors select debt funds based on interest rate expectations.
The Reserve Bank of India (RBI) monetary policy review takes place on a quarterly basis – RBI policy has a huge impact on bond yields and debt funds. However, there are also global factors which affect bond yields and debt fund returns. The US Federal Reserve (Fed) monetary policy has a huge impact on bond yields around the world, including India. The Fed meets 8 times every year. This does not mean that you need to review your debt portfolio 8 times every year because as discussed earlier, you should the objective of your portfolio reviews should be actionable takeaways. You or your financial advisor should be knowledgeable enough to get takeaways from central bank announcements. The RBI takes the Fed’s actions into considerations in its monetary policies. Therefore, quarterly reviews of debt portfolios, post RBI meetings should suffice.
Exit load and Capital Gains Tax: Mutual funds charge exit loads for redemptions or switches, before the expiry of the exit load period. Exit loads differ from scheme to scheme – you should know what the exit load of your scheme(s) is before making any decision. Short term capital gains tax is levied on profit from sale made within a certain period after the investment. For equity funds, short term capital gains period is 12 months from the date of investment – short term capital gains tax is 15%. For debt funds short term capital gains period is 36 months from the date of investment – short term capital gains in debt funds are taxed as per the income tax rate of the investor. If your entire debt portfolio is less than three years old and you want to avoid short term capital gains tax, then your debt fund portfolio review exercise prior to the expiry of short term capital gains tax period is purely academic.
On the other hand, for many of our readers, not all your investments would have been made at the same time. In all likelihood, if you are long term investor and also if you are investing through SIPs, your investments would have been staggered over a period of time. A portion of your investment may be subject to exit load; while the remaining portion may not be. As far as tax is concerned, a portion of your equity investment may be subject to short term capital gains tax, while the remaining portion may be subject to long term capital gains tax. Similarly for debt investments, a portion of your investment (less than 3 years) may be subject to short term capital gains tax and the remaining may be subject to long term capital gains tax. Depending on your specific situation, you should decide on your portfolio review frequency and what you want to review.
Financial Advisor and nature of engagement: You can invest either through a financial advisor or directly with the Asset Management Company (AMC). If you invest directly with the AMC, then you monitor your investments more closely and more frequent review process might be required. Also, you need to put in more effort in analyzing your portfolio performance, especially in terms of comparing your fund’s performances with peer funds and benchmarks. There are several online resources like Advisorkhoj MF Research that can help you with evaluating your fund’s relative performance.
If you have a financial advisor then the effort required on your part is less. The attributes of your financial advisor and the nature of your engagement with your advisor are also important factors in how you monitor and manage your investment portfolio. As a customer, you should be demanding. Tracking the market and fund performance is not your day job – your financial advisor should do it and advise you from time to time.
Some financial advisors are extremely pro-active; they will flag issues and call you, if some corrective steps are required or if some new opportunities emerge. Others may not be so pro-active and in such a case, you have to make sure that, regular reviews are scheduled with your advisor to go over portfolio performance. You should also be asking the right questions in that review and make sure that you are satisfied with your advisor’s answers; if not, your advisor should schedule a follow-up meeting where he / she will address your questions / concerns.
You may like to read what is the role of advisor in your financial planning
Tax Situation: Though relatively infrequent during an investor’s life-stage, the tax situation of the investor can change. A change in tax situation should call for review of one’s investment portfolio to ensure that the investments are most efficient in the changed taxation circumstances. For example, change in tax situations can call for change from dividend or dividend re-investment options (which have different tax treatments) to growth options or vice versa, depending on the situation. It can also call for additional investments in tax saver mutual funds (ELSS). Salary increment is not the only factor which can cause change in tax situations – inheritances, gain from sale of assets,divorce settlements etc., can cause tax situations to be changed.
At the very outset, we said that there is no “one size fits all” answer to how frequently you should review your mutual fund investments. It depends on your personal and financial circumstances, nature of your investments (debt or equity), your investment history and most importantly how you want to manage your investments. Some of our dear readers may still want a general guidance, which they will fine tune to their own requirements. We will not disappoint such readers. For your equity funds, 1 year review frequency will be suitable, but avoid taking a final call before you have observed the fund’s performance over a three year period. For debt funds, quarterly or six monthly reviews should be suitable, but take into account exit load and tax considerations before taking a final call. As always, we suggest that you consult with your financial advisor before making an investment decision.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.
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