The latest episode of ‘Smart Investing’ hosted Vidya Bala - Founding Partner & Head, Research and Product, PrimeInvestor who provided an effective framework for monitoring a mutual fund portfolio.
She was in conversation with S Gururaj, Assistant Vice President-Investor Education & Distribution Development, Aditya Birla Sun Life MF.
‘Smart Investing’ is an IAP webinar series launched by Aditya Birla Sun Life Mutual Fund and Cafemutual that strives to prepare your clients to be financially aware while engaging in more confident conservation with you.
Here are the key highlights of the session:
The two Rs - Reviewing and Rebalancing
- Reviewing and rebalancing are critical to monitor MF portfolio
- Portfolio review is checking periodically that the funds continue to perform the way expected. It is reviewing their performance in line with their peers, categories, average benchmarks, etc.
- Rebalancing pertains to asset allocation and comprises moving funds from one asset class to another. It effectively helps to limit the risk profile while booking profits
- A frequent portfolio review may turn out to be counter-productive. A half-yearly or an annual portfolio review appears to work fine. Likewise, rebalancing can be done annually
Reviewing different asset-classes
Equity funds:
- Consistency in performance is the key. The ability to stay at least in the top two quartiles over several periods hints at the fund’s consistency
- Investors could look into funds’ performance in a calendar year against its peers. Investors having some knowledge about markets can opt to review performance during the ups and downs of the market. Those wanting to look beyond calendar years or different market phases could check funds’ rolling returns through easily available online tools
- Investors could also look into matrices like Sharpe ratio, information ratio and standard deviation, which make use of rolling returns
- In the case of debt portion of hybrid equity funds, investors must be mindful of the quality of debt portfolio by looking into the kind of papers involved, associated credit risk, ratings, the proportion of AA+ papers, etc.
Debt funds:
- Fund’s ability to navigate and take right interest calls, especially when there exists duration risk like a dynamic bond fund, is important. This can be gauged through funds’ performance across interest rate scenarios
- Investors facing difficulties in the above analysis can look at how consistently have these funds performed in comparison to their peers
- Credit quality is an important parameter for debt fund review. Investors must check the fund holdings in risky papers and if that aligns with the risk appetite
- Rolling returns could also be considered
Significance of historic data
- A fund’s past data reflects the fund’s ability to stick to its mandate along with its ability to perform across market cycles
- Looking into past data, investors typically form a bias on return expectation and misinterpret it to be the return potential of a fund. However, return potential is entirely to do with the current quality of stock and economic conditions amongst other factors
Exiting from an underperforming scheme
- Investors must identify the reason for underperformance - is it the fund itself, the market or the investing strategy of the fund. This can be derived by comparing the performance with the right peers
- Funds underperforming its peer by over 3% for the past three-four quarters is a cause of concern, however, it may not necessarily warrant any immediate action as it may otherwise result in an avoidable tax burden. Also, if the fund’s margin of underperformance is seen shrinking, it hints at the improving performance of the fund
- It is recommended to keep a watch on fund’s performance for at least six quarters before taking the call to exit
- A 20% to 25% exposure in a single scheme may hurt the overall portfolio if that scheme underperforms. Excess exposure to any individual funds must thus be curtailed
Click here to view the video.
