How to examine your mutual fund portfolio and maximize returns?

Mutual funds might perform better or worse depending on market volatility and other macroeconomic factors, so investors should monitor the performance of their portfolios at those times. (MINT_PRINT)

• For long-term investors seeking to accumulate considerable wealth over time, mutual funds are among the investment options that they favour the most

 

For long-term investors seeking to accumulate considerable wealth over time, mutual funds are among the investment options that they favour the most. Your risk tolerance and financial goals, however, have a significant impact on your propensity to generate portfolio returns from your SIP. While equity mutual funds have historically produced returns that have outpaced other investment instruments, new investors should be aware of market risk. However, it is also true that mutual funds might perform better or worse depending on market volatility and other macroeconomic factors, so investors should monitor the performance of their portfolios at those times. One cannot anticipate assured returns on investment since investors in mutual funds or the stock market must be aware that past performance does not promise future performance levels. But first, let's discuss with industry experts to know how you can analyse the performance of your portfolio and maximise returns to get a better risk-adjusted return from your SIP.

Strategy by Saurav Basu, Head – Wealth Management, Tata Capital

To assess a mutual fund portfolio, one should make sure that it is aligned with the financial goals and is diversified across asset classes. A well-diversified portfolio has the ability to generate optimal returns with lower volatility over a longer period of time. Within the overall mutual fund allocation, it is imperative to track the scheme’s performance over a longer period to assess if the fund is consistently beating the benchmark, category average and is able to deliver in line with the expected returns. The evaluation of the funds should be done periodically, and reallocation/rebalancing should be done if the fund is underperforming.

In order to evaluate a fund, one should look at point-to-point returns over a 2-3 year holding period along with rolling returns of the fund. In addition to the returns, investors should also look at risk ratios to assess the risk-adjusted performance of the fund. Some of the commonly used ratios to assess mutual fund risk are Standard Deviation, Sharpe Ratio and Beta.

An investor should also review the tax implications of their mutual fund portfolio which can help to maximise the overall returns.

Strategy by CA Manish P. Hingar, Founder at Fintoo

In order to assess the health of your Mutual Fund Portfolio, compare the returns of the schemes in your mutual fund portfolio with the returns of the benchmark and other mutual funds schemes of the same category. Do not over-diversify your mutual fund portfolio as managing and tracking them will become challenging.

In order to maximize your mutual fund portfolio returns, make sure you follow the four checkpoints:

1. Link your investments with goals and according to the age of your goal i.e. investment horizon and your risk appetite, choose which mutual fund schemes are good or bad for you and your portfolio.

2. Check whether you are overexposed to a particular underlying asset and if yes, diversify your portfolio across different sectors.

3. Check for the expenses you are paying for your mutual fund schemes, as higher TER can eat up your returns in the long run.

4. It is advisable to review your mutual fund portfolio at least once every six months for Debt MF portfolio and once every 3 months for equity MF portfolio. You may look at switching to better schemes if there are any consistent laggards in your portfolio.

Strategy by Mr. Arun Kumar, Head of Research, FundsIndia

* Avoid Equities if the time frame is less than 3 years - 100% Debt Fund Allocation

* Up to 30% equities if the time frame is between 3-5 years

* 30-70% in Equities if the time frame is greater than 5 years

* Gold can be kept at 10-15% of the overall portfolio

* Choose good quality equity funds with a long-term consistent performance track record and experienced fund manager

* For Debt, stick to high credit quality funds with shorter duration

* Rebalance the asset allocation mix every year if it deviates by more than +/-5%

In the above context, the appropriate allocation to equities can be decided based on your ability to tolerate intermittent declines. A 15-25% temporary fall once a year should be considered, normal behaviour from equities. Going by history, once in 7-10 years, a 30-60% temporary fall should be a part of the expectation. Based on the above expectation and how much near-term decline you are willing to tolerate, you can roughly decide on your equity allocation. Once you get this mix right, this single decision will largely determine 80-90% of your investment outcome.

Strategy by Nitin Rao, Head Products and Proposition, Epsilon Money Mart

One should review their portfolio on a regular interval or post any market event. A portfolio should be curated as per your risk appetite and your financial goals. Many times, we have seen investors copying others. But in the long term, it doesn't bode well. A proper balance should be made between risk & return. Also, the mutual fund scheme must suit your financial goals. Simply choosing a fund because it delivered great returns in the past might be unwise as there's no guarantee that the same will be replicated in the future. Asset allocation is another important tool that should be deployed.

Strategy by Praneet Battina, Investment Team, Fi Money

1. Why assess a mutual fund portfolio or why track the investment performance?

While past performance does not guarantee future success, it does offer an appraisal of a fund manager's past successes or failures and a chance to understand their investment philosophy. Screening funds before a deep dive analysis is a good starting point. Performance tracking can also help rebalance portfolios from time to time.

2. How often to evaluate MF performance?

Generally, an annual performance review is advisable, as it can help rebalance one's portfolio from time to time. Adhoc performance reviews can be helpful when there is a significant underperformance or outperformance compared to the peer group or comparable benchmarks, which could also trigger a rebalancing.

3. Financial ratios to look for when evaluating fund performance?

An important factor to look at when analysing a fund is the consistency of returns to understand if a fund manager has outperformed their peer group across market cycles. You can do this by looking at the information ratio (IR). A five-year IR greater than 0.5 is generally a sign of high consistency of performance. It is advisable to consider rolling returns instead of trailing returns. You should also evaluate funds based on stock selection skill and portfolio differentiation, which can be measured by Jensen’s Alpha (higher the better) and R2 (lower means more differentiated), respectively.

While this is an oversimplification of mutual fund portfolio analysis, it's the bare minimum filtering that investors must do when picking a fund by themselves.

As a next step, you can try to better understand a fund's investment strategy by breaking down the portfolio cross-sectionally, based on top 10 stocks, sector bets or market cap bets, in the case of equity portfolios. For debt funds, you can do a deep dive into the portfolio's credit risk and yield curve positioning.