Here’s How To Handle A Few Tricky Situations - Hemant Rustagi Chief Executive Officer, Wiseinvest Pvt Ltd.

Although past performance is an important consideration for deciding whether to remain invested in it or not, the key is to ensure that it is measured in a manner that reflects the true picture. Many investors get perplexed with the erratic short-term performance of a fund and often ignore the importance of time diversification, i.e., staying invested over different market cycles. Investment in equity funds is essentially for the long term and hence short-term performance, especially if in line with the market, doesn’t truly reflect the ability of the fund manager. Similarly, it is important to compare the performance of a fund with those with similar investment objectives and the asset mix.[EasyDNNnews:PaidContentStart]

In fact, for equity funds, considering exposure to different market segments is equally important. For example, in a rising market, Small-Cap funds are likely to outperform the ones that invest in Mid-Cap and large caps. After SEBI decided to standardise and categorise funds, it’s become much easier to compare the performance of funds as the investment universe is clearly defined.

Another situation that often causes a dilemma in the minds of investors is when a successful fund manager leaves the fund. This is generally perceived as a very tricky situation. While in most cases, such a situation would ring alarm bells, it may not be wise to react immediately by exiting from the funds immediately. For example, if you are invested in an index fund, a dividend yield fund or in a fund wherein the rules regarding what the fund manager can do are clearly spelled out, a change in the fund manager may not have much impact on its performance.

Most fund houses usually have guidelines that a fund manager must conform to. In fact, the process of investments is overseen by an Investment Committee. Therefore, a fund house following such an approach may not find it difficult to replace a good manager with another one. Besides, if the fund has been in existence for a relatively shorter period, the change in the fund manager may not make much of a difference.

Even if it becomes clear that the former fund manager enjoyed considerable independence, a decision to sell off the holdings should not be taken without finding out as much as possible about the new fund manager. If he ran a different fund, check the fund’s track record. Ideally, a new fund manager’s performance should be judged only after a year or so. If at the end of that period, there is a visible dip in the fund’s performance, it may be time to act.

Then there could be funds that are more volatile than their peer group. A volatile fund is often a cause of worry for investors. Hence, it is important to match your risk tolerance with the expected level of volatility of the fund. ‘Beta’ is the measure of the relative volatility of a mutual fund scheme to its market usually represented by an index, such as Sensex and Nifty. Beta indicates how much the fund will rise or fall in relation to the changes in the index. To measure the impact, the market has the beta of 1 as the index chosen is the measure of the market movement. If the fund has a beta of 0.90, it represents that the fund will go up (or down) by a factor of 0.90 for every 1 per cent change in the market index. A beta of less than 1 results in lower ‘highs’ and higher ‘lows’ than the market.

Another tricky situation for investors is to decide whether to invest in sector and thematic funds or not. While these funds have the potential to improve your overall portfolio returns, there are attendant risks too. Considering that fund managers of consistently performing funds would usually ensure your participation in the emerging sector and themes by realigning the portfolio, it’s not always a good idea to invest directly in these funds. Of course, if you are an experienced investor and have the wherewithal to make the right decisions, you can consider investing 10-15 per cent of your portfolio in these funds.

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