Is Mutual Fund Categorization Affecting Your Portfolio? Review It Now!
Jul 16, 2018

Author: PersonalFN Content & Research Team

Categorization Affecting Your Portfolio

Rahil will turn 37 next month.

His mutual fund portfolio has matched that number already.

He has 37 mutual fund schemes in his investment portfolio.

About 12 years ago, he started investing in mutual funds and since then, he has been piling up his portfolio with New Fund Offers (NFOs) and star-rated schemes.  

[Read: Why To Skip NFOs, And Instead Consider Building A Strategic Mutual Fund Portfolio ]

[Also read: Why You Should Stop Looking At Mutual Fund Star Ratings Now

Being a seafarer who goes on voyages for 6-8 months,  the only time he focuses on investments is when he’s back on home soil.

Unfortunately, his investment strategy is predominantly via a lump-sum and a meagre sum through Systematic Investment Plans (SIPs).

Because of his High-Net-worth Individual (HNI) status, investment advisers, bank relationship managers, and mutual fund distributors visit him often. And, he disappoints none.

He thinks, sometimes one has to go by the product recommendation of the advisors and the relationship managers just to maintain good relationships with them.

He feels it works for him, especially when he needs some help in banking and financial matters while he’s sailing.

[Read: Why Investing In Mutual Funds Through Banks Is A Bad Choice]

Despite he being a serious saver and a disciplined investor, his portfolio has performed miserably over the last 5-8 years.

More than half the schemes in his portfolio have underperformed their respective benchmark indices. And the rest too have marginally outperformed the peer schemes.

In 2017, the whole market jumped significantly, but his portfolio was marginally up. And since the start of 2018 until the end of June, mutual fund schemes in his portfolio plunged lower than the peer schemes.

[Read: Best Mutual Funds To Invest In 2018]

Rahil is slightly disturbed by the poor performance of his portfolio of late.

Recently, he read about the Securities and Exchange Board of India’s (SEBI’s) mutual fund re-categorisation norms and its effects on the mutual fund industry. He was shaken up.

The malpractices followed by mutual fund houses and their distribution channels to grow their Asset Under Management (AUM) also took him by surprise.

[Read: ICICI Pru Mutual Fund Tarakki Karega! – The Unethical Way?]

[Also read: Is India’s Largest Fund House Taking Investors For Granted?

He has finally realised that the periodic portfolio review is extremely crucial for a mutual fund investor.

And this reminds us of the wisdom in an old adage: “A stitch in time saves nine”.

Before we understand why reviving an investment portfolio is important, let’s quickly look at how to build a mutual fund portfolio. Following these six points is crucial:

  • Identify your risk profile

  • Know your investment objectives and financial goals

  • Based on the above factors, chalk out your personalised asset allocation

  • Identify best and most suitable mutual fund schemes

  • Ensure your portfolio is well-diversified

  • Review your portfolio periodically

[Read: Investing In Mutual Funds Can Help You Achieve Your Financial Goals]

Now, let’s resume the discussion on the reviewing a portfolio and rebalancing it.

Portfolio rebalancing

Like regular health-check-ups help to diagnose some critical health concerns at an early stage, periodic portfolio review allows your investment to stay tuned with your financial goals and risk profile.

In simple words, rebalancing a portfolio is correcting the deviations in the original asset allocation.

For example, you invested 70% in equity, 20% in debt, and 10% in gold—after a year, equity accounts for 80% of the portfolio, and gold contributes 12%. At that time, reduce the exposure to equity and gold by shifting the allocation to debt so you can achieve the initial asset mix.

The buying and selling of mutual fund schemes should be carefully tuned to your risk profile, investment objectives which dovetail into your financial goals.

Rebalancing helps safeguard investments during a bad market phase; not only by booking gains but by also reducing the exposure to risky assets.

In investment planning, setting the asset allocation right and regularly rebalancing your portfolio, are important to ensure your long-term financial well-being.

[Read: Why You Seriously Need To Think About Investment Planning]  

Here are 4 benefits of reviewing your mutual fund portfolio:

  1. Cull out the underperformers 

    This is the primary reason to review your mutual fund portfolio regularly. You do not want the portfolio returns to be dragged down by laggards. Hence, it is essential to identify such schemes early on.

  2. Reinvest in better alternatives 

    Once the investments are redeemed from inefficient schemes, the proceeds need to be invested in the right schemes. This is when the best equity mutual fund or debt mutual fund must be identified backed by thorough research and keeping in mind your risk profile, investment objectives, and financial goals.

  3. Consolidate the portfolio

    Invest in just 4-5 schemes under each asset class to achieve your financial goals. Investing in too many schemes is not only unmanageable but could lead to inefficient returns. This is especially true in the case of investors like Rahil.

  4. Ensures optimum diversification 

    Optimum diversification does not mean holding almost every mutual fund scheme that is available. Optimum diversification refers to holding a set of best and most suitable mutual fund schemes in your portfolio.

    And when you invest in a few schemes, ensure that the underlying portfolio or investing styles do not overlap each other. 

    Creating a portfolio with a handful of worthy schemes isn’t an easy task. It requires thorough research. For investors like Rahil, it’s tough to spare time for this exercise.

How often should the investment portfolio be reviewed?

You need to review all investments, including mutual funds, at least once a year.

If analysing risk and return seems like Greek and Latin to you, it will be best to consult a qualified and ethical investment adviser.

Just as you avoid self-medication and consult a doctor first, it is best to approach an investment adviser before making changes in your portfolio.

To know if you are holding best and most suitable mutual fund schemes in your investment portfolio, avail of PersonalFN's Mutual Fund Portfolio Review service.

PersonalFN's ethical and unbiased investment advisers, who are effectively financial guardians, will comprehensively review your mutual fund portfolio. Your mutual fund portfolio will be revamped considering your needs and risk profile. 

Do you want to own time-tested mutual fund portfolios with SOLID wealth creation potential?

If you wish to build a portfolio based on your risk profile and investment time horizon, PersonalFN’s FundSelect Plus is the answer!

PersonalFN’s FundSelect Plus was launched in 2007 and is a “ready portfolio advisor” for you.

We know selecting winning mutual fund is not easy for lay investors, particularly after the SEBI’s mutual fund re-categorisation norms. Many mutual fund schemes have been merged with another, or their risk profiles have undergone a substantial change, following SEBI’s mutual fund re-categorisation norms.

As a result, it’s quite possible that you might be holding mutual fund schemes that are not in line with your risk appetite or unsuitable to fulfil your financial goals.

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Happy Investing!

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