I have been investing in mutual funds for the past 4-5 months. It is said that we should review our mutual fund investment on yearly basis and take decision based on that, whether to continue, stop or switch. Can you please give advice on how to review investment in a year or so?
— Sanjiv Jain
The asset allocation or the mix of various assets including equity, debt, gold, etc. held in a portfolio is considered one of the key determinants of its performance. A suitable asset allocation is typically based on one’s investment horizon and risk appetite or risk taking willingness. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity.
Hence, the first step in a portfolio review process should be to review the asset allocation and align it to one’s target allocation in case it has changed significantly. For instance, if one’s target allocation is 50% equity and 50% debt and at the end of 1 year, this allocation has changed to 60% equity and 40% debt due to varying performance of the asset classes. It would be prudent to rebalance the portfolio by reducing the allocation to equity by 5% to 10% and increasing the allocation to debt so as to align it to the targeted allocation.
As the next step, one could review the underlying investments or holdings in the portfolio. In case of a portfolio of mutual funds, the performance of each fund could be compared to other funds in the same category and to its benchmark. For instance, the performance of a large cap fund could be compared with other large cap funds and an appropriate benchmark index. Additionally, in case one has specific views on categories like large cap vis-a-vis mid-caps, etc., the portfolio can be reviewed in the context of any changes in the views.
Typically, top rated mutual funds, particularly those investing in equity, selected after conducting thorough research should be held for at least 2 to 3 years, prior to taking an exit call due to underperformance. In other words, funds that have generated superior performance over the long term (5 to 10 years) could underperform their peers over short term periods (1 to 2 years). But as long as the fund’s investment strategy or style hasn’t changed significantly, one should retain conviction in a good fund manager. Of course, exceptional factors like changes in the investment team, mergers / sell offs of the AMC, etc. would warrant a closer review. Additionally, exit loads and tax implications need to be considered while reviewing and rebalancing a portfolio.
Can my brother, who is an NRI, invest in mutual funds in India?
— Mahesh Prasad
NRIs residing in most countries, except for the US and Canada, can invest in mutual funds in India. Several AMCs have restrictions on investments by NRIs residing in the US or Canada. KYC and tax norms might vary for NRIs vis-a-vis residents.
Is there any way I can increase the amount of my SIP after three years of continuing it?
— Devender Kumar
Most AMCs permit a change (either increase or decrease) in the SIP amount after a certain stipulated time period which is typically in the range of 6 to 12 months.
After this year’s Budget proposals, do I have to pay tax on the dividend that I receive from my funds?
— Umesh Pathak
As per the Union Budget FY 2016-17, in addition to Dividend Distribution Tax (or DDT) paid by companies, tax at the rate of 10% of gross amount of dividend will be payable by the recipients, that is, individuals, HUFs and firms receiving dividend in excess of Rs10 lakh per annum. The proposed tax would be applicable only on dividends received on shares and doesn’t include mutual funds.
I am not too happy with the returns my fund house in showing on its website. Is there any way I can find out whether they are earning more and giving us less returns?
— S P Singh
The returns that fund houses show on their website are based on the Net Asset Value (or NAV) of a fund which is calculated post deduction of fund expenses. You could compare the performance of the fund vis-à-vis peers (funds following a similar strategy) and their respective benchmarks. This performance comparison should focus on medium to long term periods (3 years and above). Even funds with superior long-term performance can underperform over the short term (1 to 2 years). Besides fund performance one can compare the expense ratios of funds within the same category. Higher expense ratio for a fund vis-à-vis its peers would typically have a negative impact on its returns.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India)
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