Reviewing the performance of your mutual fund investments periodically is as important as investing your money. You invest towards meeting your financial goals after carefully analyzing your financial capability, risk appetite, market situation, etc. However, these aspects are dynamic. Therefore, you must review your portfolio at periodic intervals to ensure that your investments are on the right track always.
Let us look at the need for and importance of mutual fund portfolio reviews in detail.
What is a mutual fund portfolio?
A mutual fund portfolio is a basket of investments made for long-term, medium-term, and short-term financial goals. For long-term financial goals, investments can be made in equity and equity-oriented mutual fund schemes which help beat volatility over a long period of time. For medium-term goals, hybrid funds that invest in multiple asset classes such as equity, debt, and gold, among others can be a good fit as they provide capital protection through debt, high-growth potential through equity, and hedge against inflation through gold (Note: Not all hybrid schemes provide exposure to gold). For short-term goals, debt mutual fund schemes would be ideal as they aim to protect capital along with providing reasonable returns in the short term.
Apart from these, there are also ETFs (exchange-traded funds), index funds, and funds of funds.
When and how to review a mutual fund portfolio?
There is no thumb rule governing the time and process of mutual fund reviews. In general, you should keep an eye on the following situations:
- When your mutual fund starts to underperform: The first thing to watch out for is the performance of your mutual fund schemes. If the fund underperforms the benchmark and its category peers consistently, then it is time to take a relook at the fund. In that case, you can either redeem your investments or transfer them to another better-performing scheme. However, some underperformance may be temporary and could be due to the overall underperformance of the asset class it invests in. Therefore, it is essential to be well-informed about the fund and its performance before letting go of the fund.
- You grow older: The younger you are, the more time you have to assume some risk and explore different investment opportunities. However, as you grow older, your investment approach changes from capital creation to capital preservation. Reviewing your portfolio is important for accommodating your changing needs and risk appetite with time.
- There is a change in your financial situation: You must consider reviewing and rebalancing your mutual fund portfolio if there is any significant change in your financial situation. For example, if you happen to inherit a large estate or received a good increment in your salary, your financial standing will considerably improve. This can be a great time to add more high-risk equity funds to your portfolio in a bid to earn higher returns, provided you have time on your side (read point mentioned above). Conversely, if there is a drop in income, you might want to curtail risk and stick to relatively safer debt funds.
- Your investment objectives change: You might have started investing with the goal of saving for a house. However, along the way, you may find a more pressing need like your child’s higher education. In such a case, reviewing your investment portfolio can help you alter your investments to accommodate your new goals.
- Your tax output may increase: You may be looking at saving taxes and your existing investments may not be very tax efficient. You can review your portfolio to check which investment can be replaced with the one offering more tax benefits. For example, you can replace your Equity Fund with an Equity Linked Savings Scheme (ELSS) which falls under section 80 (C) of the Income Tax Act and provides tax exemption on investments up to Rs 1.5 lakh annually.
How to manage asset allocation during a portfolio review?
Asset allocation refers to distributing your investments across different types of mutual fund schemes such as equity funds, debt funds, hybrid funds, ETFs, etc.
You must keep the following things in mind while you are at it:
- Ensure a healthy mix of different types of schemes to achieve diversification.
- Make sure that the chosen schemes are suitable for the time horizon you have in mind. For instance, equity funds can be a great long-term tool but can be risky if you have a shorter time frame.
- Keep your age in mind while choosing your scheme.
- Keep your financial goal in mind while rebalancing.
Regularly reviewing your equity and debt portfolio will help you stay on the right track to achieving your financial goals. It will also help you rectify any errors or losses made along the way. While you should not monitor your investments daily, but you can do so at regular intervals, say monthly, when the portfolio statement is sent to you by your registrar. Any sale, purchase or redemption must be done after adequate research and understanding of the market. For guidance, you can also consult a professional financial advisor.