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Are you checking the performance of your funds regularly?

Posted on 16 Jun 2021
Author: Sayan Sircar

Tags: Portfolio Review

5 mins read
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Once a SIP is started, setup a regular process of reviewing each of your funds

Mutual fund review

If you are investing in mutual funds, then you need to check how the funds are performing. Fund review is different from the portfolio review that you should do against goals. The purpose of reviewing a fund is to decide whether to continue investing in it. Instead of looking at the returns of the fund by itself, we will check how is it doing vs. it’s benchmark and peers in the same category.

Returns will be measured at the portfolio level via asset allocation review and rebalancing.

📚 Topics covered:

What to review?
How to review funds?
When to review?
The next steps after a review
- The performance is not entirely satisfactory
- Exit the fund due to performance issues

What to review?

The following are the checks you should do:

Trailing returns and risk vs the benchmark and category for the last 3months, 6months, 1year, 3years etc. The higher the return and lower the risk, the better is the fund for investing vs. the benchmark
Rolling returns and risk vs the benchmark
SIP returns vs the benchmark for the complete period of investing in the fund
History of expense ratio (TER) changes for the fund. The TER should not be increasing in large jumps
Active share should not be decreasing

For debt funds, the overall credit quality and duration of the fund should be reviewed. However, since the portfolio credit and duration is an average of the bonds held in the portfolio, the credit quality and maturity of the individual bonds should be considered as well. Debt fund portfolios are released by the AMC every fortnight while equity and other portfolios are released every month on the AMC site. Updates in mutual fund portals happen with a slight lag.

For gold funds, benchmark against the domestic price of gold.

Investors also need to track changes in the fund strategy since they would have invested since the strategy would have aligned with their goals.

For all active funds, be aware of any fund manager changes. If a well-known fund manager leaves, the fund performance may suffer after sometime. The objective of investing is to get as high returns as possible and if the fund performance is not satisfactory for an active fund, then it should be exited.

How to review funds?

Mutual fund portals like Valueresearchonline, ET Money or Morningstar provide this information. Some sites like Valueresearchonline or Kuvera offer extensive tracking and benchmark tools to make this easy by importing SIP and lump sum purchases.

Here is a very simple test to decide if you will sell a mutual fund. Ask yourself this question: If you have 10 lakhs (or 1 crore) today, will you invest in this specific mutual fund or look for an alternative? If you answer:

yes then keep the fund
no then sell the fund

For a debt mutual fund, there is enough information in the fortnightly portfolio disclosure statement: How to understand the portfolio composition of a debt mutual fund?.

You can have a look at this list of the currently worst-performing mutual funds here: Are you invested in these worst-performing mutual funds?

Did you know that we have a private Facebook group which you can join for free and ask your own questions? Please click the button below to join.

When to review?

For a new fund, the first review should be a year after the first investment. For an existing fund, you should review it once a year. For thematic or sector-focused funds, the review frequency should be once every quarter or half-year due to the cyclical nature of these funds. The same goes for every fund that is a part of the satellite portfolio.

The next steps after a review

The result of the review can be:

Stay invested and invest more money
The performance is not entirely satisfactory
Exit the fund due to performance issues

We will deal with the last two results here.

The performance is not entirely satisfactory

You should review 3 or 6 months. Please divert the SIP that was running in this fund to other funds as per asset allocation.

Exit the fund due to performance issues

Please stop the SIP as the first step. You will have to calculate the capital gains tax you need to pay for selling all units and pay that on the next advance tax date from the money received by selling. The lump-sum amount received post-tax should be immediately invested in a replacement fund or spread out the investment amount among existing funds as per asset allocation. You should start a new SIP in the replacement fund as well. If you are unable to decide if you should exit in one go-or-not, start an STP: SIP, SWP and STP - what do they mean, which one should you choose and when?.

Use these links to quickly shortlist new funds for investing

If you are continuously looking at fund performance or what is the next good fund to invest, it is time you consider index funds for your goals instead of active funds.

Once the fund review is complete, move on to this next step to maximize your chances of reaching your financial goals.

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