Congratulations! You have put in a lot of effort and have started investing in some good mutual fund schemes for your financial goals. But merely investing is not enough. You need to also periodically evaluate the performance of your investments. This is important so that you don’t lose money by staying invested in non-performing funds. This article contains detailed guidance on some key parameters you should check while reviewing your mutual fund investments.
# 1: Your financial goals, risk profile, asset allocation:
This is the most important. Mutual fund portfolio review should not be done in isolation. First, you should start with your financial goals, risk profile, and asset allocation and then analyse individual mutual fund schemes. For example, a particular financial goal that was earlier categorised as long-term becomes short term as on the date of your review. Your first priority should be to move your investment fully in debt fixed income options to protect your investment from market fluctuations. Spending time and effort in analysing the equity schemes tagged to that goal will not make much sense as your goal is to liquidate that investment.
# 2: Returns:
Most investors make a mistake to only focus on the returns when judging the performance of a mutual fund scheme. Never check the returns of the scheme in isolation. Always check it vis-a-vis the benchmark and, even better, the average of similar schemes in the respective category. It is perfectly okay if a scheme down-performs for a quarter or two, or even an entire year. However, there becomes a case for exiting the investment if the scheme continues to down-perform for two years. You can also consider a middle path. Once you find that the scheme is not performing as per your expectations, you can stop your SIP in that scheme and move your new investments into a different scheme. Put the scheme that is not performing well on a watchlist. You can consider exiting completely from that scheme If there is a consistent down-performance for an extended period.
# 3: Changes in fundamentals:
As a mutual fund investor, you should watch out for any significant changes in the fundamental structure of the scheme. It may be a change in the fund manager, a change in the investment objective, a change in ownership of the mutual fund company etc. The reason is that all these changes can affect the investment philosophy and the long-term performance of the scheme. Generally. as per SEBI regulations, the mutual fund company has to offer existing unitholders an option to exit without paying any exit load. You can contact your advisor on the likely impact of these changes on the scheme performance in such cases. Basis your discussion, you may then decide to exit the scheme during the window offered by the fund house.
# 4: Risk:
While doing a mutual fund portfolio review, you must use the information contained in the mutual fund factsheet, which is available on the mutual fund website. Following are some of the red flags that you can watch out for:
# 5: Expense ratio:
- High concentration in a particular sector or stock
- Presence of lower-rated securities (in case of debt funds)
- Abnormal increase in risk ratios like Beta, Standard Deviation, Sharpe ratio etc.
- Increase in tracking error (in case of index funds)
The expense ratio has a direct invisible impact on the scheme returns. If you observe that the scheme’s expense ratio is out of line with the other schemes in the same category, look for justification from the fund house. If the same is not available, check whether the fund outperforms its peers by a margin wide enough to cover the increased cost. If that is not the case, you can consider shifting your holdings to a better scheme.
# 6: Taxation:
Before switching to a different scheme, it is essential to keep in mind the possible tax implications. Switching between the same fund house schemes or through a Systematic Transfer Plan (STP) also attracts tax implications. Any holding of less than one year in equity-oriented funds attracts a short-term capital gains tax of 15%. Holding above one year is exempt up to INR 1 lac per year. In the case of non-equity-oriented funds, holding less than 3 years qualifies as short-term capital gain and is taxed as per your income tax slab. Any holding of more than 3 years is taxable as a long-term capital gain. You can choose to be taxed at 20% flat tax (with indexation benefit) or as per the rate applicable as per your income tax slab (without indexation benefit). Hence, choose schemes carefully and do not rush to switch schemes as you can lose a part of the profit in tax.
Conclusion
An annual review of your mutual fund portfolio is like a health check-up for your mutual fund investments. It helps ensure that your investment is working hard for you and your schemes are performing as per your expectations. However, consider your mutual fund investment as part of your overall asset allocation. Consider your financial goals and asset allocation before moving further to analyse and decide on the individual schemes.
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