Dhaval Kapadia, Director, Portfolio Specialist, Morningstar Investment Adviser (India) answers queries in The Financial Express, from where the below has been taken.
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 a yearly basis and take decisions based on that - whether to continue, stop or switch.
Can you please advice me as to how to review my investments 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, but at the end of one 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.
