Patience Has Its Rewards
Chief Executive Officer, Wiseinvest Pvt Ltd.
It is good to see an increasing number of mutual fund investors taking the fund selection process more seriously than ever before. The key factors that are given priority are suitability of the fund, past performance, investment philosophy and universe i.e. the likely strategy of the fund and the kind of stocks one can expect to see in the portfolio, as well as the level of flexibility that a fund manager enjoys in managing the fund.
However, many investors usually face the dilemma of how frequently they need to review their portfolio and what strategy to adopt for making changes in it. While reviewing the portfolio is one of the most important ingredients to achieve investment success on a consistent basis, doing it too often can be counter-productive.
Long-term equity fund investors must know that these investments not only require a long-term commitment but also a deep understanding of the composition of the portfolio, level of volatility and close monitoring of its performance. Simply put, they need to have patience and perseverance to wait out periodic market volatility. It helps to know that volatility is a natural phenomenon in the stock market. However, over the longer term, not only do equities have the potential to outperform other asset classes but they also provide an opportunity to earn a positive real rate of return. That’s why the right selection of funds at the start of the investment process becomes crucial.
Monitoring a portfolio is as important as making the right selection at the start.
Monitoring a portfolio is as important as making the right selection at the start. However, the key is to understand that portfolio review shouldn’t always be done with the sole purpose of making changes in the portfolio. While one shouldn’t hesitate in making changes if required, it will be wrong to consider short-term performance to identify non-performing funds in the portfolio. While there cannot be a set formula for determining the perfect time to sell, one can follow certain guidelines while deciding to sell an investment in a mutual fund scheme. Here are some of these:
✓ Consider selling a fund when the investment plan calls for a sale rather than doing so for emotional reasons.
✓ Hold a fund long enough i.e. at least for 12-18 months to evaluate its performance. If one regularly moves in and out of funds more frequently than that, one would be seeking the luck that may bring short-term performance.
✓ It’s time to sell a fund when one needs the money.
✓ It’s time to sell a fund when it no longer meets one’s needs. If one has done a good job of selecting the fund initially, this will only be the case if the fund changes its objective or investment style, or if there is any change in needs.
While analysing the performance of a fund, remember that negative returns from a fund may not necessarily mean poor performance. Even the best of the fund managers are likely to give negative returns during steep market downturns. Therefore, the time period considered for review also signifies the true level of performance. For example, short-term negative returns in line with the market from a fund that has been doing well for many years means nothing and hence should be ignored. Similarly, even a bad fund manager can give decent returns when the markets are doing well. One should be vigilant enough to monitor whether the fund manager has enhanced the returns of a fund by increasing the risk level. For example, this could be by way of increasing exposure to mid-cap and small-cap stocks significantly when the markets are doing well. Therefore, both the right selection and regular monitoring are important for long-term investment success. Remember, it is not either-or, but both