Are You Keeping A Check On The Financial Health Of Your Mutual Fund Portfolio?
Jul 04, 2019

Author: Rounaq Neroy


For mutual fund advisors and investors, timely review of the mutual fund schemes is an indispensable part of the journey of wealth creation and accomplishing financial goals.

Just as you do regular medical check-ups to identify health problems, if any, and take remedial measures; reviewing the financial health of your portfolio is necessary. You simply cannot ignore and/or adopt the 'buy and forget' approach.

Making prudent investments is only half the job well done, but tracking is undoubtedly the most important best practice you can do for your financial health and blissful future.

After the SEBI circular on the Categorisation & Rationalisation of Mutual Fund Schemes, fundamental attributes of a number of schemes have changed while some schemes have merged with another. Given this, it is possible that you could be holding a mutual fund scheme/s in the portfolio that may not match with your initial investment objective and expectations set when you first invested.

[Read: Your Mutual Fund Scheme Renamed. What Should You Do?]

It is likely that you may have invested a good amount regularly, but the scheme proved to be a non-performer.

You may ignore underperformance due to short-term turbulence or volatility in the market, or possibly because the fund manager took a contrarian bet to the market. It may take some time for the fund to overcome the volatility and the fund manager's strategy to pay off.

However, when a mutual fund scheme continues to repeatedly and consistently underperform over a longer period, then it is a sign of poor quality of fund management and you need to deal with it seriously. The following could be some of the reasons for it:

  • - Poor characteristics of the portfolio;

  • - Lack of efficient investment processes & systems;

  • - Lack of a robust risk management system;

  • - Poor skills and experience of the fund manager or maybe he/she is overloaded with many schemes

[Read: Why Do Certain Mutual Fund Schemes Underperform?]

Do note that a non-performing mutual fund, by definition is one that consistently underperforms relative to its benchmark and peers over the long period. If you've been holding non-performers in your portfolio, the returns clocked may not be meaningful enough to accomplish the envisioned financial goals.

To check the consistency of a scheme's performance, evaluate...

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(Image source: freepik.com)
 
  • ✓ Historical performance - This will help you track the scheme's performance across different periods (1-year, 3-year, 5-year, 10-year, and since inception) and in market phases (bull and bear).

    While evaluating performance, it is important to not just look at the returns but the risk as well. To put it simply, assess the risk-adjusted returns.

    [Read: Why Comparing Returns to Risk Is More Meaningful!]

  • ✓ Performance vis-a-vis benchmark and peers - Merely comparing a scheme's returns vis-a-vis its benchmark is not enough. Relating the scheme's overall performance with its category peers will give you a better perspective to take decisive action, rather than gauging the performance in isolation.

  • ✓ Portfolio characteristics - The fortune of a mutual fund scheme, as you know, is closely linked to its portfolio characteristics. Meaning, the type of securities it holds in the endeavour to accomplish the stated investment objective. Therefore, the quality of the portfolio a mutual fund scheme/s matters.

    Ideally, an equity scheme should not be concentrated to a particular set of stocks and/or sectors, unless it is the stated investment mandate.

    Likewise, in the case of debt funds, the manager must take care to have high-quality debt papers while maintaining the maturity profile and managing the credit risk.

    In addition, the scheme should also have a low churn ratio as excess churning increases the overall expense of the scheme and impacts the returns.

  • ✓ The quality of fund management - The fund management team is directly responsible for the performance of the mutual fund schemes it offers. Hence, holding schemes of an efficient fund house that performs well across schemes and follows robust investment processes & systems is important.

    Plus, check the profile of the fund manager --his /her experiences; the number of schemes he/she manages; the performance track of schemes they manage; and so on.

While checking the consistency of the scheme's performance, giving adequate weights to each of these parameters is essential for meaningful results.

Remember, if the scheme has not delivered the required performance in a sufficient span of time, then it warrants your attention --calls for pruning and weeding out the duds to replace them with better and well-deserving schemes to ensure you are on track to accomplishing your financial goals. The aim of mutual funds, particularly equity-oriented schemes, is to outperform its benchmark and provide you with better returns - generate an alpha.

[Read: Things To Do To Keep Track Of Your Mutual Fund Performance & Investments]

Similarly, you ought to ensure that the portfolio is well-diversified across fund houses in order to reduce 'fund house concentration risk'. Holding schemes of fund houses with larger Assets under Management (AUM) does not make the mutual portfolio robust or safe. It is not necessary that all schemes of a large fund house will prove to be well-rewarding.

Moreover, what's noteworthy is the schemes ranked at the top or bottom of the ladder haven't been from the same fund house consistently.

At times, even smaller fund houses can offer you better returns across their product portfolio.

Here are 5 key benefits of a mutual fund portfolio review:

  1. Helps to identify underperformers

  2. Find suitable alternative mutual fund schemes

  3. Facilitates optimal structuring and consolidation of the portfolio

  4. Ensures optimal diversification

  5. Aligns your portfolio to ensure you are on track to accomplish your envisioned financial goals

How frequently should a portfolio review be done?

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(Source: unsplash.com)


You need to review your investments bi-annually or at least once a year. This is a relatively good frequency. If you have selected mutual fund schemes thoughtfully, then reviewing and rebalancing the portfolio too often may prove to be inappropriate.

Here are a few reasons when a portfolio review is necessary:

  • Whenever your personalised asset allocation warrants a change due to changes in financial circumstance, risk profile, investment objectives, and financial goals along with time horizon for the goals to realise.

  • When there is a change in return expectations.

  • When the portfolio characteristics of the scheme are not up to the mark (like in case of certain debt schemes, where the quality of debt papers was being compromised with lower-rated instruments).

  • When the fundamental attributes of the scheme (investment style + strategy) undergo changes (as that influences the performance of the scheme positively as well as negatively).

  • Any macroeconomic and regulatory changes that may weigh on your portfolio.

If you take timely actions, your portfolio can be well-aligned to accomplish the envisioned financial goals. An unhealthy portfolio not just stops you from fulfilling your financial goals but also weakens your financial future.

This reminds us of the wisdom in an old adage: "A stitch in time saves nine".

The truth is, NOT all mutual funds are good.

Most importantly, not all mutual funds are good for YOU.

Every mutual fund comes with its own strengths and weaknesses, and it actually depends whether it suits the investors, risk profile, broader investment objectives, financial goals, and the investment horizon before goals are realised, among many other aspects.

So, just as you avoid self-medication and consult a doctor when it comes to your medical health, it is best to approach a Certified Financial Guardian, who shall comprehensively review your mutual fund portfolio and provide all the information and recommendations in a 'special customized report'.

The analysis includes:

  1. Studying the mutual fund house's investment philosophy, processes and systems.

  2. Studying the scheme's long term performance (at least for 5-10 years), across market cycles.

  3. Performing risk reward analysis, judging portfolio concentration (company-wise and sector-wise), strategic consistency and quality, etc.

  4. Checking the fund manager's long term performance and his overall work experience.

  5. The asset allocation of your portfolio

  6. The category-wise holding of your portfolio

  7. The AMC wise exposure of your portfolio

  8. SIP/STP/Switch analysis

  9. The risk analysis of your portfolio

  10. And recommendations/action plan with meaningful comments to strategize your portfolio

A mutual fund portfolio review service will offer a course correction, if needed, and serve in the interest of your financial health and wellbeing.

Get your portfolio reviewed today!


Happy Investing!

This article first appeared on Certified Financial Guardian.  


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