Ways to Review your Mutual Fund Portfolio

Published On: 06-Jul-2020

The investors are living in a dynamic world and the financial goals or the risk appetite of the investor may change over a period of time. As such, it makes sense for the investors to keep checking on a regular basis that they are on the right track to reach their financial goals. 

 

 

Here is why it becomes important to review mutual fund portfolio on a periodical basis:

  1. Underperformance of the Portfolio The portfolio of scheme may not have generated the returns as expected. As such, the financial goal may not be achieved over the desired time frame with similar returns in the future as well.

  2. Changes in the financial goals The financial goals may have changed or got bigger than anticipated earlier. As such, the mutual fund portfolio needs to be reviewed for existing corpus and the additional corpus required. 

  3. Changes in the Risk Profile of the Investor The risk-bearing capacity tends to decrease with growing age. As such, the investment portfolio must adjust suitably to match the changing risk appetite of the investor. 

  4. Utilising Income Tax Exemption for Long Term Capital Gains – Income tax laws provide for an annual exemption of Rs. 1 lakh a year for long term capital gains on equity-oriented fund. The periodical mutual fund portfolio review may identify such profit booking opportunities for the investors to make the most of this tax exemption, which resets every financial year.

Here is how you may review your mutual fund portfolio:

1. Reviewing the Performance against the benchmark

The investors must review the performance of the mutual fund schemes. The asset allocation of the portfolio against the respective benchmark indices. Such a review must be based on the long-term performance of the fund, as the short-term performance may be impacted due to several other reasons than just the fundamental portfolio performance. Continued underperformance of the mutual fund investments may culminate into a lower investment corpus and thus, tend to exert a higher pressure on the later years to achieve the desired financial goal.  

2. Reviewing the Performance against the Similar Category Funds

The scheme performance must also be viewed against the performance of similar category funds. Superior performance over the peer fund schemes displays the alpha being generated by the fund managers and hence, reflects on the fund management skills of the fund manager. 

3. Replacing the Underperforming Schemes with Better Performing Schemes

If the fund has consistently underperformed the markets and the benchmark indices, one must consider replacing the fund with a better performing fund. This ensures that your investment portfolio continues to grow at a reasonable pace and enables you to stay on track to achieve your financial goals over time. 

4. Topping up your Systematic Investments

Your financial goals may have increased, and so must your periodical investments too. As such, the mutual fund portfolio must be reviewed to identify the SIP top-up required, so that your goals may not have to be restricted at a later stage due to financial constraints. 

5. Reviewing the Asset Allocation 

The asset allocation of the mutual fund portfolio must match the risk profile of the investor. Further, even while the asset allocation may have been suitable at the time of investment, it may have changed due to the relative performance of different mutual fund schemes/asset classes. Here is a small illustration to highlight this change:

Particulars

When equity outperforms

When debt outperforms

Equity

Debt

Equity

Debt

Initial Investment 

Rs. 100

Rs. 100

Rs. 100

Rs. 100

Initial Portfolio Allocation

50%

50%

50%

50%

Returns generated over 1 year

20%

5%

5%

15%

Portfolio value after 1 year

Rs. 120

Rs. 105

Rs. 105

Rs. 115

Portfolio allocation after 1 year

53%

47%

48%

52%

 
So, even while there may not be any changes in the risk profile of the investor, the portfolio allocation needs to be suitably adjusted to stay at the original level. 

With the above-mentioned techniques and steps among others, the investors must review their mutual fund scheme portfolio on a regular basis, and dynamically manage the portfolio to adjust to external changes. This also ensures that the investment portfolio stays relevant to financial planning and investment strategy of the investor.

Disclaimer: The chart/information shared above is for illustrative purposes only and should not be construed as advise. The above is to illustrate the concept of asset allocation. There is also a possibility of the expected event not happening or some other unforeseen event that may affect the future performance of asset class. Investors are requested to note that there are various factors domestic and global that can have impact on performance of the asset class mentioned in the article. Information given is available in public domain.