Here is a quick guide on how to review your mutual fund portfolio.
First, do not focus too much at the NAV of the schemes you have invested; or even the returns offered by them in the previous year regularly. The NAV of a mutual fund scheme does not give you any indication about its performance. Same for the returns it offered during different periods. In isolation, these numbers do not tell you anything about the performance of the scheme.
You should always compare the performance of the scheme against its benchmark. For example, if the scheme has given 10 per cent returns in one year and its benchmark offered 15 per cent during the same period, obviously the scheme is not performing.
Mutual Funds are mandated to offer a benchmark for every scheme to help investors to get a fair idea about its performance. If a scheme fails to beat its benchmark, it clearly says that the fund manager has failed to produce any extra returns by actively managing the fund. You could have invested in an indexed fund and saved some money as index funds typically has low expense ratio.
Next, take a look at the category average returns. This figure tells you how the category (for example, equity large cap funds) has performed vis-a-vis the scheme. If the scheme has returned more than the category average, it indicates that your scheme is an above average performer. If it fails to match the category average returns, it shows that the scheme is a below average performer.
Okay, what if your scheme turns out to be an above average performer? Should you be happy with it? Yes, you should be, but still it makes sense to compare the scheme with its peers to see by what margin the scheme is lagging the best performers in the category.
What if the scheme fails on all these comparisons? First, put it on the watch list. Next, you should try to find out the reason behind its underperformance. Find out whether the scheme has changed its mandate, whether a key fund manager has left, etc. If the scheme has changed its mandate, ensure that it still matches your investment objective. If no, sell it and transfer the money to a scheme that matches your investment objective. If a key person has left the scheme, give it some more time before taking a call on continuing with it.
If the scheme has started performing badly in the short term, you should also try to find out whether the fund manager has taken some contrarian calls. If the call is backed by sound logic, you should give the fund manager some time to perform. If he gets the call right, the scheme may bounce back soon.
If the scheme continues to underperform for a period of a year or more and if you are not happy with the fund manager's reasoning for its lack-lustre performance, you should sell it and move the money to a scheme in the same category.
INDIA
NRI
