Once upon a time, we had the best of both worlds. The interest rates on debt products used to be high – as high as 15 per cent or even more, with virtually no risk. No wonder, the equity cult did not catch up then. There was just no incentive to assume risk, for uncertain returns of the stock market. The equity markets themselves were shallow and prone to manipulation. The stock market was seen as a gambler's den.
But then things have changed. Today, the best one can expect is in single digits. It is expected to fall from here and it could again come back to 5-6.5 per cent like it was a in the 2002-06 period. Inflation, however, has been ruling at close to 9 per cent and food inflation has been running pretty high for the past three years. With the returns one is getting today, the post tax returns are not beating inflation and one's corpus is falling in the negative.
That is why equity assets have had come into the portfolios of many the past couple of decades. For normal investors, equity market is a somewhat difficult place to be in, considering the study required to pick out winners among stocks. That brings us to mutual funds, which has become a vehicle of choice for the normal investors, as the fund manager puts together a portfolio and manages the same for you. Mutual Funds schemes are available in various avatars too. There are diversified equity funds with large, mid and small-cap orientation, Value-based investing funds, balanced funds, Index funds, sector funds etc. So there is a whole list of schemes and dozens of fund houses to choose from.
Having chosen the schemes, should one relax? That would be a mistake. For, a fund which is in first quartile could slowly slide into oblivion and someone who has not been monitoring the same, is bound to be negatively impacted due to this.
It is necessary to keep monitoring one's MF portfolio – that's for sure. Some people keep looking at the NAVs every few days and want to know if they should cash out. That, of course, is not the way to go about it. After choosing good funds, one has to give the investment sufficient timeto perform and fetch returns. Like they say, time in the markets is more important than timing the markets. Lots of people however try to time it and want to enter and exit at the correct time. Most of us do not have those divine powers!
The correct approach after carefully putting together a portfolio is to do a review once every three or six months. In this review, one has to consider what the relative performance of the chosen scheme has been vis-a-vis the benchmark index chosen by the fund and the performance vis-a-vis the other peers in the category. For instance, if one has invested in HDFC Top 200 Fund, the chosen index is BSE 200 and the category it falls under is large-cap diversified funds.
If the fund has been able to beat the chosen index (and the index is in fact an appropriate index) and has also beaten the peers, it will be a good fund to have in one's portfolio. If the fund has beaten the index but has not been able to beat the average performance of the peer group, you know that the fund may be having a bit of a problem. What do you do? Exit?
No. Mutual Fund investments are made with a long-term orientation and one needs to stay invested for the long-term. One cannot exit at the first whiff of fall in performance. The fund manager could have taken some calls, which may not have come out as intended. Or, the calls taken may pan out well in the long-term. It might also be that the fund manager has not invested in momentum stocks and the sectors which are currently fancied, but is still well positioned for future growth. In all these cases, even if the performance is not top drawer stuff, one could keep the faith and keep the funds. It is only when the fund is lagging for three or more quarters should one change. Churning the funds constantly is not so helpful, as a rule. So, one needs to be careful on this and needs to take this step, only if it is warranted.
If one knows the style of the fund manager and what his history has been across funds and with various fund houses, it is even better. For some managers are hands-on aggressive players and some others seem to take longer term calls. Depending on this, one could choose the fund itself. If the fund manager has a good track record, keeping the scheme may be a good idea. When the fund manager changes, one needs to keep the schemes on the watch list. Sometimes, the new fund manager may have completely different ideas and may manage the schemes completely differently. If that does not suit the overall portfolio orientation, one could consider exit and switching into another scheme in the category, which more closely hugs the ideal parameters one is looking for.
Sometimes, one may also see that the fund manager may not be sticking to the mandate and may be picking stocks to just pump up returns. This is not such a good thing, even if the fund is showing good returns as one's allocation to large-cap / mid-cap stocks can change and could increase the portfolio risk, more than intended. When you put together a portfolio, there is a certain method and exposure that we want to have in the portfolio. If that keeps changing it is a negative. Such schemes have to be weeded out.
In a nutshell, keep your portfolio intact if it shows good performance as compared to index and peers, if you trust the fund manager, if the fund manager has not changed and sticks to the mandate, if the composition of the fund has not changed and the risk to the portfolio has not increased. Stay invested to reap the rewards – but keep your eyes open and review the portfolio from time to time. Buying and forgetting Mutual funds is done at one's own risk.