How to Review Your MF Portfolio ?

Building a mutual fund portfolio is the starting point of a long journey towards achieving your financial well-being. DSIJ explains in detail the importance of reviewing your portfolio and more importantly the specifics you should keep in mind while reviewing your portfolio.



For most of us, making a mutual fund portfolio is the ultimate goal in our financial plan. We do lot of research and deliberation before making a portfolio, however, once prepared, we believe our process of financial plan is complete. Nonetheless, making your portfolio is only the starting point and more arduous job of creating wealth and reaching your goals remains a long journey. Going for a financial plan is more like going for a vacation on your vehicle and hence you should keep a close eye on your dashboard that will help you to reach your destination safely.

Be it your vehicle or your health, everything needs a regular check-up and that is also true for your mutual fund investments. Even if nothing has changed materially about your investments, you still need a check-up at equal intervals. There are two important factors around which you need to review your portfolio. First is the frequency, and second is the factors that need to be reviewed during the regular check-up of your portfolio. You should always set aside some time for regular reviews of your portfolio. A quarterly review is recommended for most investors, followed by a thorough examination once in a year.

Quarterly Portfolio Review

Not much changes in a quarter, but conducting review of your portfolio every quarter protects you from any surprise when you do your thorough annual final review. The goal of the quarterly check-up is to find out any major changes within your holdings and portfolio overall. In order to keep your quarterly review short and simple, you will need to review items within three key areas of your portfolio.

Performance-Related Data - The first question that comes to mind of any investor while reviewing his portfolio is, how much money or return has been generated by the portfolio. The next thing to look for is, which holdings have generated best returns or funds that have generated negative returns. These are the funds that need your extra attention during your yearly review. These returns should not be viewed on absolute basis, but on a relative basis. It may be possible that your worst performing fund may be one of the best among its peers. Therefore, you may still hold the fund if it is giving you the benefit of diversification and reducing overall risk of your portfolio. Therefore, the performance a fund needs to be judged based on its relative performance and not on its absolute performance.

Portfolio-Related Data - During your quarterly review, in portfolio-related data you check primarily for two things. First is the asset allocation and second is the sector allocation. In asset allocation, you need to assess if and how the big picture of your portfolio has changed. It may happen that your equity allocation needs to be at 60% of your portfolio, however, now it has been at 64%. This may not be due to rise in your equity portfolio, but it may be due to fall in the debt part of the portfolio. Therefore, keeping a track of the reason for change is important to take appropriate corrective action at your annual check-up.

Besides overall asset allocation, you also need to also check the sector limits of your portfolio. It may happen that finance or any other sector has crossed the limit that has been set by you or is beyond your tolerance level. This should not trigger any buying or selling of the funds. The objective is to keep tabs on major portfolio-related changes as they develop. This will make your year-end review easier.

Fundamental Changes - Any fundamental changes in the funds that you are holding need to be further probed and is probably the most important part of your quarterly review. For example, if the fund manager of one of your holdings has changed, you need to ascertain if the change in fund manager will also lead to change in strategy or it will remain intact as dictated by the fund house. While it is not uncommon to see management change over a period of time, frequent changes should raise a question as change in the fund manager often leads to a shift in the investment style.

Second, check the history of the fund manager who has replaced him. If he is from the same fund house, chances are high that not much is going to change. Above all, in such cases, working of a fund house need to be analysed deeply in terms of the selection of stocks and building of portfolio.

The other major fundamental change that can take place within a fund is rise in expense ratio or portfolio turnover or mergers or acquisition of the fund you are holding. Any of these changes also warrants an immediate attention by you.

Annual Portfolio Review

No amount of your quarterly review will replace the annual review of your portfolio. Although nothing new need to be reviewed other than what you have done in your quarterly reviews, you need to go deeper and make necessary changes.

While doing your annual portfolio review, you need to check the following items:

Major Asset Allocation - At the end of the year, chances are high that your asset mix in terms of equity, bond and cash have changed. It may happen that you are in year 2017 when equity portion of your portfolio has outperformed other asset classes and hence its total weightage has increased. Nonetheless, in year 2018, debt and especially long duration debt, has performed better than most of the other asset classes. In both the above cases, you need to bring the asset allocation to your original or planned asset mix. If you fail to do this, you may find your portfolio underperforming. Moreover, as you go closer to your goal, it is good to shift your funds to more conservative assets so that you do not face any problem in meeting your goals.

Keeping your assets in the prescribed limits helps you to keep your portfolio's volatility in check and even helps you in booking profit in asset that has performed well. Excessive stock exposure will make your portfolio much more vulnerable to stock market slumps. At the other extreme, investing too much in debt funds could hamper you from meeting your goals.

Sectoral exposure - While doing your annual portfolio review, it is important to check for sector exposure. If your portfolio has tilted towards any particular sector, you should bring it back to the required level by trimming your exposure to the fund due to which you have increased exposure to the sector. Or you can also wait for your fund manager to reduce the weightage. Nevertheless, at the fund level, it may happen that exposure to a sector is within control. However, at your portfolio level, it may happen that you are more exposed to a particular sector.

Hence, the responsibility is on you to take appropriate action to bring back your sectoral limit to required level. Concentrating on one or two sectors of the market might pump up your returns temporarily, but it will also leave you dangerously exposed to downturns in those sectors.

Exposure to individual companies - You check your portfolio and chances are high that in most of the funds you will find HDFC Bank and Reliance Industries. You need to check the exposure to these stocks in your overall portfolio. This will help you to determine if unintentionally you have invested in the stock that have generated best returns last year and now forms 15% or more of your total portfolio, which could slide from here. Hence, weed out or scale back those funds that are heavy on such stocks so that your portfolio can reach a safer limit.

Rebalancing

The annual review should ideally culminate in rebalancing of your portfolio. Some of the concepts of rebalancing may seem to be counterintuitive for most of us as they may warrant you to sell some of your best performing funds. Nonetheless, you should always follow that cardinal rule of investing, that is, selling high and buying low. Moreover, if you continue with the same portfolio, it may entail risk.

The reason why you should stick to the asset mix you had decided originally is because it will help you to meet your goals. If you do not hold the right portfolio mix anymore, it makes sense to restore the mix. While doing rebalancing, keep a check on the expenses, such as exit load and taxes. 

It makes much sense to set aside time for regular portfolio reviews throughout the year to ensure that your portfolio is on the right track. Even if nothing has changed about your investments, it is still important to make sure that your portfolio's asset allocation is where you need it to be.