A periodic review of the mutual fund investment portfolio can help you understand whether you are on the right track to meet your financial goals or not. Ideally, this review should be done on a half-yearly basis or at least on a yearly basis. In an e-mail interaction with FE PF Desk, Shrinath ML, Senior Research Analyst at FundsIndia shares a quick guide on how to review your mutual fund portfolio. Edited excerpts:
First, evaluate your current asset allocation. If there are large deviations (> 5%) from your original asset allocation, you will have to rebalance your portfolio to align the same. But before you do actual rebalancing, evaluate the individual funds in your portfolio.
Evaluating equity portion of portfolio
Compare the performance of your equity funds versus their benchmarks and identify funds that have shown consistent underperformance on a 3-5 year basis across the last few reviews.
The underperformance can sometimes be due to the fund’s style being out of favour. For example, equity funds following the quality style did not do well in the last two years as the style was not in favour. You can figure out style-related underperformance by comparing the fund’s performance versus other equity funds following the same investment style.
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If the peers are also going through tough times, then the underperformance is likely to be style-related. You need not worry much as the fund’s performance is likely to pick up, as the style turns back in favour.
Instead, if the peers are doing well, then the underperformance merits a closer look. Some common drivers of such underperformance can be – stock selection not playing out as expected, changes in investment strategy, fund manager changes etc.
Apart from performance, also keep a watch on the consistency in investment strategy, fund manager stability, fund size, portfolio composition, liquidity and churn for all equity funds in your portfolio.
Keep an eye on exit load, tax impact
If there are serious concerns, you can decide to stop incremental investments or even exit your investments. However, keep an eye on the exit load and taxation when making the exit decision.
Evaluating Debt portion of portfolio
Now moving on to the debt portion, check the credit risk and interest rate risk of the debt funds in your portfolio. It is generally better to exit debt funds that take high credit risk (>25% of portfolio invested in non-AAA rated papers) or those that take high-interest rate risk (modified duration > 5 years).
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Also watch out for over-concentration (if any single fund exceeds 20% of your overall portfolio, reduce exposure to that fund) and over-diversification (if there are too many funds with less than 5% exposure, try to consolidate them).
The money from the exited funds can be reinvested into other funds in such a way that you are aligned with your current asset allocation. If the asset allocation is still not aligned, do additional rebalancing by reducing exposure to funds with the highest weightage.
Disclaimer: The views and suggestions mentioned here are those of the respective commentators. The facts and opinions expressed here do not reflect the views of www.financialexpress.com. Please consult your financial advisor for any mutual fund-related queries.