Have Patience, Let Your Fund Manager Have Enough Time To Perform

Hemant Rustagi believes getting emotional about non-performing investments or waiting endlessly in the hope of recovering losses can be a fruitless exercise. He also suggests investors to invest ‘wisely’:

One of the key advantages of investing through mutual funds is their abilities to help investors build their portfolios which are suitable to their needs and risk preferences. However, to achieve the desired results, investors must first ascertain their asset allocations and thereafter invest in funds that can get them best risk adjusted returns from each of the asset classes.

Needless to say, this entire process of deciding an appropriate asset allocation and selecting the right funds can be a little tricky. That’s because one must know how different asset classes correlate with one another as well as what it takes to select the suitable schemes from numerous options on offer in different categories.

While choosing suitable options, the focus should be on funds that are consistent both in terms of following their investment strategies as well as the performance. Therefore, it is always advisable to put in sincere efforts while designing an effective portfolio.

Although selecting suitable funds can play a vital role in deciding the level of success, one can achieve from one’s mutual fund portfolio and one may still have to face situations wherein even the most consistently performing funds could become erratic during certain time periods. These can be testing times even for experienced investors.

Investors must ensure that they don’t make any haphazard decision in situations like these. Therefore, ascertaining the cause of slowdown in performance becomes the key factor for them. The performance may slip on account of fund manager’s error of judgment, changes in domestic and international economies, interest rates and more such factors. Hence, it may not be appropriate to abandon the fund in a hurry.

Remember, if the fund losses ground in a falling market and falls in line with its benchmark index, it should not be much cause for concern. On the other hand, if the fund goes down when its peers are giving positive returns, it should be taken as a warning signal. That’s why; the key to measure performance is to compare it with its peer group. For example, while analysing the consistency of a fund that invests in a particular segment of the marker i.e. a mid-cap fund, one need to consider the level of volatility that the segment itself may be witnessing. However, the skill of the fund manager and the fund’s investment philosophy can ensure that the fund is less volatile.

Therefore, making investments could at best be considered as the first step in an on-going process wherein regular monitoring of the performance is a key ingredient to achieve success. However, one must give enough time to the fund manager to perform. Of course, once it is proven that the fund is slipping in performance; one should not hesitate to get rid of it. By doing so and re-investing the money in schemes that have better quality portfolio and track record, one can enhance one’s chances of improving the returns over time.  Remember, getting emotional about non-performing investments or waiting endlessly in the hope of recovering losses can be a fruitless exercise.

Another aspect that requires attention is an appropriate level of diversification in the portfolio. Investors must know that diversification does not mean owning a number of funds. To determine the right level of diversification, one has to consider factors like risk profile, size of the portfolio, type of funds and allocation to different asset classes. It is equally important to pay attention to the level of risk one is willing to take to meet one’s returns expectations.

Risk tolerance should also be addressed from two perspectives: financial risk tolerance and emotional risk tolerance. Investment professionals often define risk as volatility–in other words, how much one’s investments will rise or fall in a given period. Individuals usually define risk as the potential to lose money or not meet their goals. Every equity fund investor must know how comfortable will he be if his portfolio goes down 5 per cent, 10 per cent or 20 per cent during a certain time period. It is equally important to know how long can one hold on to investments during volatile periods.  

Remember, a long-term investor can handle volatility in a much better manner as he has time on his side- time to let aberrations in the market work themselves out.  Similarly, every time the stock market is in short term disarray, a long-term investor benefits from the buying opportunities it presents.