Even as investors need to stay invested in equity funds for the long run, there is a need to review their portfolio on a regular interval. This is because good funds can turn poor performers and bad funds can become great performers over time. And investors can use their portfolio review to make fresh investments in good funds, identify poor performers so that they do not drag returns and check if the portfolio is getting too concentrated in a few funds, or a particular investment style, or an AMC, said Vidya Bala, Co-Founder, PrimeInvestor.
At Cafemutual Confluence 2020 Investment Marathon, Vidya shared some of the basic principles of reviewing a portfolio. She feels that while investors need to buy and hold equity funds, they need not hold the ‘same fund’ for life. “If underperformance is persistent, don’t hesitate to switch,” said Vidya.
Redefining the ‘buy and hold’ strategy, Vidya said that patience does not mean putting up with prolonged underperformance. Buy and hold equity; but which funds to hold is a call to be taken. And that needs periodic review and some judgement. Citing an example, Vidya said one-third of the total universe of funds that were all in quartile one and two in rankings in 2009/2010 moved to the bottom two quartiles by 2019. The reverse was also true. Those in the last 2 quartiles have moved up. Effectively what this means is that a ‘good’ fund does not always stay good and a bad fund can improve and deliver, she said.
On the process of changing funds, Vidya felt that investors should not change a scheme if it has underperformed for a few months. However, if a scheme has underperformed its benchmark for 3-6 quarters by 3-6 percentage points, it is indeed underperforming and requires a change.
Next, investors need to see if the underperformance is due to the theme/strategy itself. For example, a value fund may be underperforming the Nifty 50 but it is likely that other value funds are, too. In that case, compare with peers to know if the fund is a poor one among the other underdogs. “It is a different call if you choose to exit a strategy. That is more about your portfolio requirement and less to do with the performance of the fund,” said Vidya.
If a fund has been underperforming its benchmark and peers, the first step can be to stop SIPs. Then start the SIP in similar category funds in your portfolio or choose a better one.
On selling a fund, Vidya felt that investors need to exit immediately in case they sense credit events in a debt fund. Else, there are three dimensions that investors should take into consideration while exiting a fund. These three dimensions are exit load, taxes and size of exposure in the fund.
Click here to watch Vidya’s session at Cafemutual Confluence 2020 Investment Marathon.
