Performance Matters The Most
Hemant Rustagi Chief Executive Officer, Wiseinvest Pvt Ltd.
While the right selection of funds helps you begin your investment process well, monitoring their performance ensures that you maximise your returns over time
Every investor endeavours to maximise returns from a portfolio consisting of market-linked products like mutual funds. However, in reality, investors achieve different levels of success. Considering that achievement of important investment goals is crucial for one’s financial future, one must avoid mistakes that can create gaps between expectation from the portfolio and what one actually earns. To begin with, you must identify the real reason as to why and how this gap can occur. Usually, most investors end up attributing it to poor performance of the funds in the portfolio.
While performance plays an important role in determining the level of investment success, it is equally important to analyse whether the portfolio was built to achieve the desired results or not. Although poor performance can indeed be an important reason for this gap, there are a few other factors emanating from your investment strategy that may also create such a situation. Broadly, there can be issues like not choosing funds suitable to your requirements, not following a disciplined investment approach and allowing your emotions to dictate investment decisions that can cause more harm to the portfolio.
Clearly, it is important for you to understand the real reason for the gaps so that corrective measures can be taken to bring the portfolio back on the track. Mutual funds offer numerous options to investors with different risk profiles and varied time horizons and investment objectives. Needless to say, you must make a proper selection to benefit the most from the expertise of the professionals managing your money. Analysing the portfolio and monitoring its progress are the other key factors. Contrary to common belief, this exercise should not be restricted only to analysing the short-term performance of funds.
There are a few other factors that require equal amount of monitoring and focus to ensure that your entire portfolio delivers the desired results. There is an issue of over-diversification. Many investors believe that having a large number of funds provides high level of diversification. Another reason responsible for this phenomenon is that many investors do not follow an asset allocation strategy whereby one determines allocation to not only various asset classes but also to different market segments before making investing decisions. The result is often a hodgepodge portfolio that not only becomes unmanageable but also takes you beyond your risk tolerance.
If you too have a portfolio that has a large number of funds, you need to take steps to prune the portfolio to make it more manageable and improve overall returns. Remember, having good funds in a small proportion or having too many nonperforming funds can severely damage your long-term prospects. While the right selection of funds helps you begin your investment process well, monitoring their performance ensures that you maximise your returns over time. Therefore, if a fund is not keeping pace with its peer group, it makes sense to exit from it and move the money into funds that deserve a look from a long-term point of view.
However, this must be done after giving reasonable time to the fund manager to perform. It is a well-known fact that different segments of the market 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. However, the skill of the fund manager and the fund house philosophy can make a difference to the performance even in the segment that is not doing well. That’s why, it is important to compare the performance of a fund to the peer group rather than its benchmark alone.
Hemant Rustagi Chief Executive Officer, Wiseinvest Pvt Ltd.