How to Review your Mutual Fund Portfolio?

Updated on 26 Jun, 2024

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Do you wear woolen clothes in summer or swimwear during winters? Though they might not be the right outfit for the season, we still have them in our wardrobe. Depending on our individual choices we choose clothes to keep in our wardrobe.

How often do you change your wardrobe? This totally depends on the quality of the clothes, but also on your mindset during that time. In most instances, clothes that look like brand new are discarded while in some, we keep wearing that one favorite t-shirt does not matter how old it gets.

Mutual Fund portfolio is similar to your wardrobe. Even though you have put much effort into designing it, it requires your attention occasionally.

Investment Portfolio

When you are investing for the first time, analysis of various factors like age, financial position, risk profile, investment objective, financial goals, investment horizon, etc. are considered before choosing the funds. Therefore, based on these factors asset allocation for your funds is done.

Unlike a wardrobe makeover, which would follow the current trends and fashion, your investment portfolio has to be reviewed and rebalanced based on solid analysis of the performance of various funds and asset classes.

Portfolio Reviewing

Reviewing your mutual fund portfolio yearly and taking appropriate decision based on the review is a good strategy.

Maintain asset allocation during portfolio reviewing

Here are a few instances that call for portfolio reviewing:

Change in circumstances: An additional inflow of funds from selling an ancestral property or your spouse quitting their job, these examples have two different impacts on your ability to take the risk and would, in turn, have an impact on your asset allocation.
Change in risk appetite: With age, the risk tolerance reduces. Individual’s perspective towards a fund changes with time. With annual portfolio reviewing, you’ll be able to bridge the gap between your risk tolerance and the exposure to different asset classes.
Performance of the asset classes: Performance of assets classes will have an impact on your original asset allocation. It is important to restore your original allocation. However, it is equally important to review each fund under every asset class and rebalance it accordingly.
Change in the objectives: Let’s consider an example, where you are saving for your child’s education. You have planned for your child under graduation course in India, but when you’ve observed your kid’s interest towards his/her education stream, you have decided to send them abroad for higher education. But, have you planned for this? In such instances, your entire calculations will go for a toss. How would you pay for it? Here’s when a periodic review of your portfolio and objectives would help in rebalancing.

During the portfolio reviewing exercise, it is a very common observation that the asset allocation that you had initially planned for would have undergone changes. Rebalancing strategically to maintain the original asset mix will allow you to adhere to your financial plan regardless of how the market behaves. However, do not be overly worried about this. A deviation of about 10% from the original allocation will have a significant impact, keep this threshold for yourself.

Retain long term focus

When certain funds are performing extremely well in your portfolio, it is easy to go astray and enjoy maximum returns while they last. However, do not forget the cyclic nature of the markets – what goes up will come down eventually. Therefore, strategically try to alter your positions in the profit-making funds, if they have exceeded your expectations and invest in those that have good potential in the long term.

Conclusion

Therefore, while portfolio reviewing, do not look at the numbers in isolation. Always, compare the returns of the fund to its benchmark and category average. Do not over-diversify your portfolio as it would become difficult to manage and track them. Also, too many funds would lead to an overlap in their portfolios. And, last but not the least, do not ignore your asset allocation. If the allocation is designed to help you achieve your goal, stick to it no matter what.

Finally, do not invest in your future based on the current market conditions. Do not avoid funds that haven’t performed well in the past year. For your long-term financial goals, stable funds with good history are a must.

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