Balancing, evauating and rebalancing mutual fund portfolio....

            The aim of this column is to educate investors about the parameters that they should consider when analyzing their mutual fund holdings. Before getting into this exercise, I am assuming that investors would have created an appropriate portfolio depending upon the risk profile suitable to them. A risk profiler will cover aspects like the age of the investor, investment objectives, time horizon, existing investments, income and liabilities and the ability to take risks. The portfolio created should have a proper asset allocation depending upon the results of the risk profiling exercise done by the investor with proper risk mitigation measures. These measures could include the following factors: the portfolio should not be concentrated in just 1 or 2 fund houses, the funds included should not have overlapping stocks, the market capitalization tilt of the portfolio should depend upon the risk profiler, etc. I am of the view that creating an appropriate portfolio is only work half done; investors will have to take the effort to review their portfolios on a regular basis. A regular review of portfolio does not mean that investors will have to monitor it on a daily basis; however a quarterly review should be done so that they are aware about how their hard earned money is being utilized by the expert fund managers in the industry. In this context, let me pen down some pointers which investors can consider while reviewing their portfolios.

          Performance is the first factor that can be considered while reviewing portfolios. However; this parameter can be looked at from different angles. The performance of a portfolio can be reviewed by checking if the funds in the portfolio have been able to beat their respective benchmarks or if the portfolio has been able to outperform the major indices, i.e. the Sensex and Nifty. The alternate way to check performance of the portfolio vs the benchmark is to construct an appropriate benchmark which will be a culmination of 2-3 indices by assigning suitable weights to them. Another metric that can be used is the evaluation of the relative performance of the funds; here I am referring to the performance of a particular fund vis-à-vis the peer group.

            The performance of the portfolio should be tracked over a period of time. For instance, let’s say an investment of INR 1 Lakh had been made into a mid- cap fund like IDFC sterling Equity Fund on January 9, 2012 and the fund value became INR 1, 45,802 on January 21, 2013.The normal investor psyche in this case will be to sell this investment and book profits before the market takes a u-turn. When this decision is made, the investor tends to forget the time horizon and the goals for which the investments have been made. There can also be instances when investments have been made into sector or global funds for 2 years and if the investments have been in red, then typically, investors would give an exit call. However, here the investors have to keep in mind the fact that investments into these funds should be made only if they see some future potential in these types of funds. In short, the performance of the portfolio should not be done in isolation; investors should keep themselves abreast about any changes that are being brought about in the funds that they hold in their portfolios.

             Active management is a habit that investors must cultivate to ensure that the investments turn out to be positive for them in the long run. A simple example can be shown with the help of fixed income instruments which are used to mitigate the overall risk to the portfolio. Two years back, if an investor had made an exposure into Fixed Maturity Plans (FMPs) and if these have matured now, then the best investment option in the current scenario would be to consider duration funds. In short, this is an informed decision that the investor will have to make so as to make sure that his portfolio is moving in the right direction.

             Another important factor that needs to be considered is to see if there is a change in the risk profile and if the answer is a yes, then appropriate changes will have to be made in the portfolio. For instance, if an investor had created a portfolio in his early twenties for the purpose of saving, if after 5 years he had a family, has taken a loan for buying a house, and his investment objective is to plan for his child’s education then the existing portfolio would have to be modified as per the new risk profile.

            To conclude, I would like to advice investors that they should not stop just at performance when monitoring their portfolios but should also hold accountable the fund management teams with whom they have trusted their surplus. To do this, they will have to spend a lot of time and effort for the same which is not possible in this rat race called life. This is where investors need to take the support of financial advisors and together they should be able to create and monitor the portfolios. Hence, in my opinion hand holding is needed if investors have to make the right investment decisions.