Periodic review and rebalancing of mutual fund portfolios is as critical as investing regularly and staying invested for a long period—an aspect many of us tend to gloss over.
While investing for the long term remains the basic tenet of success for SIPs, it is also imperative that investors track and review the performance of the schemes in their portfolios and weed out underperformers, if any, periodically.
This is because the performance of funds can vary, and the top performer in a specific period may not be in the same position in subsequent years. This makes it imperative for investors to regularly analyse the performance of the funds they have invested in, if only to ensure their portfolio has the better-performing funds.
For example, an analysis of the top five funds of 2013 in the Crisil-classified large-cap, diversified, and small- and mid-cap funds categories shows that a majority of these funds underperformed the average returns of the respective category in the succeeding 3 years, through 2016. In the large-cap and small- and mid-cap categories, four of the five funds lost out to their peers, while in the diversified equity funds category, three of the five underperformed.
What’s more, even assuming one invested equally in all five top funds in 2013, the investor would have still lost out compared with the category average returns in 2016. The difference in returns despite investment in all five funds is as much as 3% on an annualised basis in the large-cap and small- and mid-cap categories. That’s the opportunity lost by an investor who did not review and rebalance her portfolio during this period.
The analysis, though not comprehensive, does point out the perils of not tracking fund performance on a regular basis.
Investors should note that the time gap for rebalancing the portfolio should be neither too long nor too short. Too long a time gap reduces the efficacy of the review, while too short a gap might not allow the right time period to compare performance.
From a psychological point of view, delays in review can be attributed to procrastination by the investor. Most people tend to wake up only when there is strong positive (market upsurge) or negative (market carnage) stimuli, and attempt to review and make changes in the portfolio. But this can upset long-term financial planning.
The fundamental rule of investing through SIPs is to invest in a disciplined manner on a regular basis, rather than be swayed by market movements. By extension, even portfolio review and rebalancing should be a disciplined and regular activity, rather than be spurred by mental or market biases.
A demerit of not reviewing the portfolio for a long period is a deviation from one’s original asset allocation plan. For instance, within equity mutual funds, investors might invest in different types of mutual funds based on market capitalisation (large-cap, diversified and small- and mid-cap funds) and their individual risk return profile. If kept un-reviewed for too long, the variation in performance of underlying assets can change the original asset allocation pattern and may not sync with the investor’s risk profile anymore. Hence, the reviewing and rebalancing process should be seen holistically, from an asset allocation point of view.
Last but not the least, care should be taken to factor in costs associated (exit loads and taxation) while rebalancing a portfolio.
Investors should note that rebalancing is more of a hygiene check on the investments. The long-term investment trajectory should remain the main plank of SIP investments into equity mutual funds.