Putting Performance In Perspective

What are the criteria that you use to assess your portfolio’s returns? Do you know how to separate the grain from the chaff with respect to your investment schemes? Remember, making the right selections as well as entry and exit decisions all hinge on your ability to evaluate your portfolio’s performance correctly.

KEY POINTS

• You must know how to differentiate a fund manager’s poor performance from the stock market’s poor performance. In a falling market, a fund manager cannot be expected to give positive short-term returns.
• The right way to assess the performance of funds in your portfolio is to compare it with the scheme’s benchmarks as well as with that of other schemes in the same category over different time periods.

Performance is one of the key parameters for investors in deciding whether their portfolios require some changes or not. However, most investors find it tricky to handle various aspects related with reviewing the performance of funds in their portfolio. Besides, while some investors tweak their portfolios in a hurry, others remain invested for years in the hope of better performance someday. Then, there are investors who are not sure at what intervals they need to review their performance.

Moreover, while reviewing the performance is important, it is important to put it in perspective and also understand the reasons for non-performance. As an investor, you must know how to differentiate a fund manager’s poor performance from the stock market’s poor performance. In a falling market, a fund manager cannot be expected to give positive short-term returns. In fact, if the fall in the fund is less than its benchmark, it amounts to outperformance.

Here are some guidelines that you need to remember while reviewing the performance of your portfolio:

• Analyse how your portfolio is performing from the view point of your personal goals. Are you comfortable with the price fluctuations that may have occurred, keeping your short, medium and long-term goals in view? If your answer is in the negative, you must realign the asset allocation of your portfolio.
• While the stock market tends to be volatile from time to time, different segments of the market, i.e. Large, Mid and Small-Cap also perform differently at different times. As the tide shifts in favour of a particular segment, the performance of funds focussing on that segment improves dramatically. Therefore, making changes in one’s portfolio every now and then based on short-term performance of a particular segment can backfire over the long term. The key is to focus on your allocation, as that helps in earning returns commensurate with your risk profile.
• The right way to assess the performance of funds in your portfolio is to compare it with the scheme’s benchmarks as well as with that of other schemes in the same category over different time periods. If a fund is not keeping pace with its peer group, it makes sense to exit and move the money to another fund that deserves a look from the long-term point of view. By doing so and re-investing the money in schemes that have a better quality portfolio and track record, you can enhance the chances of improving your portfolio’s returns over time. Remember, the performance of a scheme is best measured in terms of its total returns. The total return is the percentage of change in the Net Asset Value (NAV), with the closing NAV being adjusted to take into account the dividend distributions made by the fund.
• You should hold a fund long enough to evaluate its performance, i.e. a minimum of one year or so. Avoid making the mistake of either holding onto funds for too long or exiting in a hurry. If you take a wrong decision, there would always be the risk of missing out on good rallies in the market or getting out too early, thus missing out on potential gains.
• You must do a thorough analysis before taking a decision to sell. It is quite common to see many investors err in selling funds without giving them time to show what they can do. That is why a proper selection of funds becomes an important activity. If you select well at the start, you can prevent these situations from occurring frequently.
• As regards the strategy to deal with non-performing schemes, you should consider the possibility of switching to another scheme of the same fund only if it has a scheme that is performing well and fits into the portfolio without disturbing the original allocation. For example, if you are invested in a Mid-Cap fund, a sector fund or a specialty fund and wish to re-invest in the same category, the same mutual fund may not provide you with this opportunity.

HEMANT RUSTAGI
CEO, Wiseinvest Advisors Pvt. Ltd.