Art Of Portfolio Management

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

One of the significant activities for a long-term investor is to review the performance of the portfolio periodically. It is important as it helps in determining whether the portfolio is on track to produce the desired result or not. However, despite the proven value of this exercise in their wealth creation process, investors either don’t consider it important or often find it tricky to handle various aspects relating to measuring the performance of funds in their portfolios. As a result, many of them err by either tweaking their portfolios in a hurry or remaining invested for years in the hope of an improved performance from funds performing poorly.

Then, there are those who get into the habit of tracking NAVs of funds every day and hence find it extremely stressful to handle the impact of the market volatility on their portfolios. Although reviewing the performance is important for the long-term health of the portfolio, the key is to put performance in perspective and understand the reasons for nonperformance. As an investor, you must know how to differentiate a fund manager’s poor performance from the stock market’s poor performance. Remember, in a falling market, even the best of the fund managers can’t deliver positive short-term returns.

To put it in perspective, if the fall in NAV of a fund is lesser than the benchmark or peer group, it amounts to outperformance. Remember, reviewing fund performance in a haphazard manner can compel you to make some investment decisions that could have a significant negative impact on your financial future. Therefore, you must follow the right process to do so. Here are some of the guidelines that can help you review the performance of your portfolio rationally:

✓You must analyze the performance of your portfolio from the viewpoint of your personal goals. If the level of volatility is in line with your asset allocation and there is clarity on time horizon for each of the financial goals, there is no need to panic.

✓ While the stock market tends to be volatile from time to time, different segments of the market i.e. large-cap, mid-cap and small-cap also perform differently at different times. As the tide shifts in favour of a particular segment, the performance of funds focusing on that segment improves dramatically. Therefore, making changes in the portfolio every now and then based on the short-term performance of a particular segment can backfire in the long term. The key is to focus on your asset allocation as well as allocation within an asset class as that helps in earning returns commensurate to your risk profile.

✓The performance of the fund must be compared with the scheme’s benchmarks as well as with the peer group over different time periods. If a fund is not keeping pace with its peer group, it might be time to move the money into another better performing fund. By doing so, you can enhance the chances of improving portfolio returns over time.

✓ You should hold a fund long enough to evaluate its performance i.e. a minimum of 4-6 quarters. Avoid making the mistake of either holding on to funds for too long or exiting in a hurry.

Remember, a wrong decision can either expose you to the risk of missing out on good rallies or getting out too early, thus missing out on potential gains. You must do a thorough analysis before taking a decision to sell. Many investors err on the side of selling funds without giving them time to show what they can do. That’s why proper selection of funds becomes an important activity. If you select well at the start, you can avoid these situations occurring frequently.