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A checklist for evaluating your MF portfolio
Published On , 7 Mar 2018 By TOI
You have been investing in mutual funds for several years and have built a portfolio of several funds which could be 10, 15 or more. There are several questions that are in your mind and you are searching for answers. Some of them are as follows: How often should I review my portfolio? Are there too many products or too little in the portfolio? Should I exit from the non-performing schemes or should I book profits from the performing ones? Here is a checklist that could be helpful in making these decisions.
First, check if your portfolio is in sync with your Goals and risk appetite. An ideal investment process requires you to define your Goals clearly, do an assessment of your risk appetite and then make an asset allocation decision. On one end of the spectrum are investors seeking capital appreciation with the ability to withstand significant loss of capital in the short run. They are called aggressive investors who would have predominant investments in Equityrelated schemes. On the other extreme, investors seeking capital preservation with no appetite for any loss of capital would be investing 100% in Liquid Funds. The above process would help you to define what is called 'target asset allocation'. This is the most crucial parameter required for a meaningful portfolio review.
Though there is no magic formula to define how often you should review your portfolio, I prefer at least one full review every year. If there are significant market movements or changes in your Goals, then you may do these reviews more often. As you would have guessed, market movements, performance of underlying investments and the additional investments or withdrawals can take you away from your target asset allocation. If you are significantly off your target allocation then it may be worthwhile to consider switching some of your investments.
The next logical part of the review is to look at each of the underlying investments that you have within an asset class. For example let us evaluate all the Equity funds that you currently hold in your portfolio. You can evaluate each of these investments against the broad indices (say Nifty or Sensex) and against the benchmark indices of the fund. If all your Equity funds have done well or have fared badly, it clearly indicates that the funds have a lot of duplication in the underlying stocks or the underlying investment strategies. In other words, you do not have a truly diversified portfolio and there is a need to make modifications to the same. If you have funds that have divergence in performances, it is in fact a good thing provided your underlying funds have benchmarks that reflect the investment strategy of the fund manager and the funds have outperformed the benchmarks. I would recommend a change in portfolio only if the funds have high correlation and/or show sustained underperformance over years.
The next part of the review is more to do with your overall account and should reflect your present correspondence details: Update bank accounts (as your redemptions would be directly credited as per the details provided by you) and nominations. If you follow these steps, of a target asset allocation and periodic reviews, you would have little to worry about and you would help yourself stay on course for achieving your long term financial Goals.
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