I started investing via SIP but after a few years the fund is not performing well. How should I evaluate the fund? What are the parameters I should consider while reviewing the fund?
The performance of a fund would depend on the performance of the underlying asset classes viz. equity and/or fixed-income. Hence, evaluate the performance of your fund in the context of the same and compare them vis-à-vis their appropriate category peers to assess their performance. If a fund has been delivering below-average performance consistently (2-3 year period), you may switch to a more consistent one. In the case of equity funds, look at the manager’s track record, performance in bull and bear phases, volatility, consistency in performance vs peers and benchmark (calendar year and trailing returns) and the risk-adjusted performance. From a portfolio standpoint, one could look at the diversification (sector, holdings), market-cap split (large/mid/small), style (growth/value) and active share vs the benchmark. Look at the performance attribution of the portfolio (vs benchmark) to gauge the fund’s sources of returns (Sector vs Security selection) to determine whether the performance is broad-based or contributed largely by a select few sectors and/or holdings. Be mindful of the costs as well in the case of two very similar funds.
For fixed-income funds, look at the manager’s track record, performance in rising and falling interest rate cycles, volatility, consistency in performance vs peers and benchmark (rolling alpha) and the risk-adjusted performance. Look at the credit and duration positioning of the fund across market cycles and how the manager has actively managed the portfolio in response to evolving interest rates.
In the current interest rate context, should I invest in long-duration funds?
Bond prices are inversely related to interest rates, i.e. as interest rates rise, bond prices fall and vice versa. Additionally, higher the duration of a bond, the greater is the mark-to-market loss during rising interest rates and vice-versa. Longer-duration funds witness a higher fall in value than shorter-duration funds for the same rise in interest rates. Hence, investors typically tend to gravitate towards lower-duration portfolios when they anticipate rates to rise.
The domestic fixed-income market has witnessed the interest rate cycle turn a corner in the YTD period, and interest rates are now on the upswing. Over the last year, the sovereign yield curve has seen an upward shift and has also flattened considerably. This flattening of the yield curve has lowered the attractiveness of longer-duration securities relative to shorter-duration securities. Given the likelihood of further aggressive rate hikes, one can expect further upward pressure on interest rates in the near term. Hence, look to be neutral weight long-duration funds vis-à-vis their target allocations (as per their risk appetite) given the higher mark-to-market risk involved, with the bulk of the investment being into shorter duration funds and medium duration funds.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to firstname.lastname@example.org