Are You Tracking Your MF Investments The Right Way?

One of the hallmarks of investing in mutual funds is their ability to allow investors with different risk profiles and time horizons to design the portfolio to suit their needs. It is heartening to see an increasing number of investors taking the selection process seriously and looking beyond past performance by focusing on factors such as suitability of the fund and investment philosophy as well as strategy. However, monitoring the performance of funds in the right way still remains an area where investors often falter.

 Hemant Rustagi 
Chief Executive Officer, Wiseinvest Advisors 

The dilemmas that many investors face are about the frequency at which the portfolio needs to be reviewed and what should be the strategy to exit from non-performing funds. Investors often get into the habit of tracking performance on a daily basis and that compels them to make haphazard changes in the portfolio. While reviewing one’s portfolio is one of the key elements to achieve investment success on a consistent basis, frequent reviews can be counter- productive as funds having varying degrees of exposure to equities are likely to react to market movements in both positive and negative manner. However, these funds perform well over the longer term and help investors achieve some of their important goals. 

Therefore, long-term investments need to be nurtured and that can be done by waiting out short-term market volatilities and keeping uncompromising focus on the long-term investment goals. While a well-defined time horizon helps a great deal in tackling the intermittent volatility, the right fund selection process can also do the portfolio a world of good. 

If you are looking to work out a strategy to monitor the progress of your portfolio, it will be a good idea to begin with a quarterly review. This will prompt you to ask relevant questions to your advisor, if you have one. The regular interaction will not only ensure that your portfolio remains on track, but also make you a better investor. 

Remember, the tracking of performance should not be done with the sole purpose of making changes in the portfolio. In other words, do not allow short term performance to drive your investment decisions. While there is no set formula for determining the perfect time to sell, you can follow certain guidelines while deciding to exit from a scheme. Here are some of these: 

• Consider selling a fund when your investment plan calls for a sale rather than doing so for emotional reasons.
• Hold a fund long enough, i.e., for at least 12-18 months to evaluate its performance. If you regularly move in and out of funds more frequently than that, it will do you more harm than good.
• It is time to sell a fund when it no longer meets your needs. 

If you have done a good job of selecting the fund initially, this will only be the case if the fund changes its objective or investment style, like it happened post categorisation and standardisation of schemes recently, or if your needs change. Do not make the mistake of either holding on to funds for too long or selling them without giving sufficient time to fund managers to generate heathy returns through their investment strategies and philosophies. Remember, the negative returns from a fund may not necessarily mean poor performance. Even the most seasoned fund managers are likely to give negative returns during market downturns. Therefore, the time period considered for review signifies the true level of performance. 

The key is to consider the relative performance vis-à-vis the fund’s benchmark as well as the peer group, rather than looking at the absolute return. For example, the short term negative returns in the current marketlike situation from a fund that has been doing well for years means nothing and hence should be ignored. 

In fact, even when a fund is doing well, you should be vigilant enough to monitor whether the fund manager has enhanced the returns by increasing the risk level. For example, this could be by way of taking concentrated bets either on sector or stock level. As is evident, the right selection process and regular monitoring are important for your long-term investment success. Remember, it is not either-or, but both.