Sorabh had posted a fairly lengthy comment a few days ago, and I really don’t know the answer to all his questions or even the primary one which was how you go about reviewing your mutual fund portfolio but I do have some thoughts (which are probably fairly obvious to everyone) on how to identify a mutual fund that you should get out of.
First, here is the comment (edited) for context:
Sorabh September 2, 2012 at 12:06 am 
Can you do a write up or invite someone to do a write up on â€œHow to Review your Mutual Fund Portfolioâ€, the standard statement that I read and listen to is invest in MFs and review your portfolio in every 6 months. I am not sure how do I go about reviewing it.
For example, it’s now two years that invested in SIPs in certain funds, some of the funds were giving a return of 30% few months back but i didn’t do anything about it. In fact I am not sure what to do, do I just shave off the profit only?
Then do what with that profit, put it in a debt fund? Or put that profit in my worst performing fund? or do I completely sell off that fund, then what do I do with a lump sum?
I don’t want to invest the whole sum in another MF, as I may be getting a bad deal at that time. Do I use SWP? When do I use SWP? When do i kick out a fund?
They say when its performing below its index average…OK in what time? 3 or 6 months? also don’t I lose in getting the fund taxed if i pull the plug before 1 year?
So I am looking for you assistance to basically reveal some â€œMF juggling strategiesâ€ to make money in the long run. Because today after 2 years I see my whole mutual fund portfolio giving me 5% return, some of the funds in it are 30% profit , while some which were 20% profit 6 months back are atÂ a 5% loss today. I am really banking on these mutual funds to help me retire. I don’t want to be disappointed when I am 60 because when you look in retrospect, investing a lump-sum 10 years ago in a fund is a better deal than a SIP in the same fund (we discussed this a while ago) so I am not sure about the strategy, with my broker taking 1.6% (ICICI Direct) my returns are in fact 3.5% today.
Can you do a post on this?
The one specific question that I have some thoughts and experience is which mutual fund I want to get out of, so I’ll take that up in this post.
When you invest in a mutual fund or ETF – there are broadly two decisions that you’re taking – first one is that you want to invest in this particular asset class so you could say that I believe that PSUs are going to do well, or I believe that blue chips are going to do well, or just that index stocks are going to do well, and that’s the first decision you take.
The second decision is within this space, which fund should you invest in and that question is a lot harder than the first one.
So let’s take the second question first.
In my mind, the first reason for dumping a fund is when it doesn’t track its underlying asset correctly. So, if you bought an infrastructure mutual fund which is doing much worse than the infrastructure index because they own a lot of banks, that’s one reason to get rid of the fund. It is not doing what it is expected to do and you want to get into something that is doing what it’s expected to do.
When thinking about this it’s important to understand that the fund should track its underlying index not what you think its underlying index is. I’ve seen a few comments that say something like my real estate funds are bad because they are worse than the index, but the real estate funds aren’t supposed to track the index; index funds are supposed to track the index. You chose real estate funds to track real estate so it’s the first decision that needs reviewing, not the second decision.
The second reason I think is when other cheaper funds come in the market, and you have more options than before. Gold ETFs are a good example of this where for some years GoldBees was the cheapest and had good volumes, but now there are many more with low expenses which had similar performance. So now there is no reason to just stick with GoldBees and you can look at owning other names as well.
If you bought an expensive, under performing fund to begin with then you can think of switching to something else. You may have not known about this factor earlier, but now that you know, you can get into something better.
Another reason is if you find something about the fund manager that changes your opinion of the fund and makes you uncomfortable, that’s a reason to dump the fund.
If I bought into a NFO and find that the fund never gathered much popularity and has low assets under management, I’d like to get out of such funds as it’s not likely that it will get much attention from the fund house and may be merged with another scheme.
I have written about all these factors earlier as well in my post on under performing funds, and my belief from that time hasn’t changed that the gains you will make from your mutual funds will be because the market did well, and that’s an assumption that you are making – that the market will do well over long periods of time. If you weren’t making that assumption then 100% of your money would be in equities (which I assume it’s not) and there’s just no way to get around this fact.
You may look at your mutual funds in despair if they have returned only 3.5% in two years but if the market has also returned only that much then what else could an equity mutual fund do? It’s not the fault of the mutual fund in that case, and I don’t see a lot of point in churning funds.
The time frame also needs to be longer, if you look at time to retirement, that’s probably 30 years, but you want to make a decision on the fund in 3 months – that’s a bit lopsided. You need to see the funds at least for a year to get any sense of what they’re doing.
My own opinion on this is it is neither practical nor possible to zero in on the best fund year after year in a category and if you have something which is close to the underlying index then that’s good. Most of your gains will come in by being in that asset class and not because you own the best fund in that category. Of course, it’d be great to be in the best fund, but then how do you do that?
Now, to the first question – which is should I be in this asset class at all? That’s up to the reason of why you invested in those assets in the first place, and have those reasons changed. If they have changed, then you change, else stick with it.
This post is from the Suggest a Topic page.
26 thoughts on “How do I know that I’m invested in the wrong mutual fund?”
I’m confused, can you help?
was reviewing mf’s, and noticed a perplexing thing–take a fund, in this instance Franklin India Smaller Companies Fund.
Going by the Moneycontrol portfolio returns for 5/3/2 yrs are 14%, 33%, -5%
But if you do a fund search on Moneycontrol, returns for 5/3/2 years are 2.7, 9.9,-2.5
Morningstar has a totally different set of numbers 20, 10 and 3%.
Wondering which set of numbers to go by. The fund factsheet on the FT site has only yearwise return!
The reason of this distortion might be because of difference in time period for returns, nothing else. Any ways, if you want return figures- go to Valueresearchonline.com. There you can generate returns between any two dates from P2P return tab (http://www.valueresearchonline.com/funds/h2_point2point.asp) Further, there are multiple other tools to analyse funds yourself.
You can also calculate returns on your own by tracing the NAV of the fund. To get historical NAV go to http://www.icraonline.com or http://www.amfiindia.com.
Lets compare the data from the same source , Moneycontrol ( as it should not contradict itself , and it is not doing so ! )
check the following link.
Figures given by you are close to these two sets, difference in numbers is because the first set is an Absolute Return and the second set is Annualised return.
How to read this ? lets take the 5 yr line
5 years 15.4 2.9 where 15.4 is absolute and 2.9 is annualized return.
15.4% means that 5 years back if you invested in lumpsum 100 Rs it will be 115.4 today.
2.9% means that 5 years back if you invested in lumpsum 100 Rs it would have grown at 2.9% per annum year over year and would have looked to grow like this ..
102.9 1st yr
105.8 2nd yr
108.9 3rd yr
112.1 4th yr
115.3 5th yr
So its the same value , just different ways to look at it… Annualized return of 2.9% smooths out the the ups and downs of returns that a fund goes through over a long period and gives you a virtual growth no. which you can assume for your understandings.
however on a side note if i were you and i assume if you want to SIP at this fund, i will check the SIP return calculator, its on the same link pasted above , put in 1000 rs and monthly frequency and i chose 5 yr time period ie between 15 oct 2007 to 15 oct 2012 i see the return is 13.63%
Thanks for the great questions and responses! Anyone looked into why there is a difference between Morningstar and VR? I might clean this thread up a little and make it a full post.
Manshu – the difference might be because of the following….
Calculation differences: Morningstar calculates total returns by reinvesting all distributions at the NAV (price per share) on the reinvestment date used by the fund. We then compound the funds monthly returns and annualize the figure for time periods greater than one year. Other firms may employ different methodology. For example, some services reinvest all dividends at month-end prices. Morningstar takes the extra step to obtain the actual reinvestment price that an investor in the fund would receive for reinvesting distributions into additional shares. When reinvestment prices are not available, we assume reinvestment at the market price on, or as close as possible to, the dividend-payment date.
That’s a good point and if they were doing that then the growth mutual funds performance should be identical.
Does Morningstar have Indian MFs?
The Investment Cycle-
Step 1. Decide your goals, investment horizon, expected returns, risk profile blah blah blah….
Step 2. Design a portfolio by allocating funds in all 3 segments Eq/ Debt/ Others (gold/ global funds)
Step 3. Put the portfolio on action. Invest as per your portfolio plan. (hah ! take rest… all over ???)
Step 4. Time to review-( http://www.onemint.com/2012/09/13/how-do-i-know-that-im-invested-in-the-wrong-mutual-fund/#comment-255579)
Step 5. Redeem and Reinvest- the cycle goes on & on & on…
I felt to write this up considering the entire discussion above.Thanks to Ramamurthy, Paresh, Manikaran, Arjun sir and mostly Sourabh. 🙂
Many times I hear the argument that investing in Equity direct requires research and analysis. It may be necessary for a trader. But,for the long term investor,I dont think it is.The theory is if do not have the required expertise ,invest thro Mutual Funds and avoid direct investing. I am a long term investor and I dont do any technical analysis or detailed research before choosing the company to invest.I choose big companies with long history behind it.I choose the Sector with which I am familiar.This does not require much research.So far(last 8-10 years), this tactics has been good to me. I did investment thro MF also.I withdrew from them after looking at their pathetic performance and after giving the a long rope(5 Years).Expertise of MF managers??.
I am bit confused with the query. I mean, Is sorabh looking for a way to find out the best mutual funds or in other sense a way to point out and disown bad funds or Is he worried about his retirement savings? Because if the former is true than the Process suggested by Rahul is the only one which he’s to follow. Now if he’s not a finance man then there’s nothing wrong in working with a financial advisor who can help him do all these analysis otherwise he’s free to make his approach more complex.
His concern is very common among investors and in behavior finance we call it a “Recency effect” , where people tend to make decision for long term on the basis of recent happenings and “Risk-Reward Parity” when people tend to value reward more than risk.
I think the first and foremost thing that one has to understand is How different asset classes works and also deciding your asset allocation and your approach towards a particular asset class. Along with a particular approach you need one most important ingredient in your portfolio i.e Patience. If this is not there, then no portfolio will suit you.
Though the goal is Retirement which calls for investment but you are looking for some trading and that too through Mutual funds. You have to understand that you will not be able to find the best fund that’s why you have to settle down with the above average category. But every long term investment needs time to perform. SIP doesn’t work in Rising or Flat market. Check out how stock market has performed in the last 2 years and you will get your answer. If anyone had known this before than definitely one would have gone for lumpsum investment then SIP.
3rd point in your approach says that you want to do SIP in FMP, which itself clearly shows that you need time to understand products……I don’t understand what is meant by “Major market moves”, If the target is Retiremnt then why are you ignoring Debt funds….Just because of taxation?
This is also sure that the movements in stocks is much more than in MFs, but stocks require more research and attention in selecting.
To achieve best results, better to concentrate on Asset allocation and your goals and keep on rebalancing the same year on year, this will automatically help you in booking profits or shifting from one asset class to other. Do it yourself if you know the nuances otherwise take help of some professional. If you are not comfortable or don’t believe anyone then do give yourself some time to study the working of these products and then select as per your goal.
You seem new investor…better give time to yourself.
Thanks for your inputs Manikaran, appreciated it
– about the query – i am looking at ways to protect my retirement savings nest egg
– i am not looking at “trading” MFs, i think giving a fund 2 years is a good enough time to atleast review it to know if its to be dumped.
– you are right i dont know enough about many things , FMP included – i realise now that is a closed ended fund so no SIPs
– i do want to include debt funds , i will do that now.
All i wanted to know , what are the rebalancing strategies which work for people, and what does “review your fund portfolio” mean and actions to take post that review.
much thanks for your time.
We should understand that no fund is permanently good and no fund is permanently bad.
In 2007, HDFC funds were out of steam and then bounce back thereafter.SBI magnum tax gain was the best fund few yrs back and see bottom performance in recent years.
we are on the highway..One should not expect his fund at number 01 or no 02 position always..
in reality no one knows how the said fund will perform in future..and even if any one,,whether any distributor or planner claims so then understand that he is making you a foool.
First up – thanks for writing a post about the suggestion and for your kind inputs, appreciate others comments also , it will help me in making a decision framework on how to review this issue.I must say, I am not giving a fund 3 months to perform for a retirement planned 30 yrs ahead. I gave a whole bunch of funds good 2 years. Now post two years is what i wanted to review ..
all of you must have heard that even after 5 yrs of SIP the top funds have given nothing , esp like DSP BR 100 , HDFC Top 200 etc that news made me worry more about this nest egg which i have just started 2 yrs back. i have some other investments but i wanted this to be the Core.
Appreciate the octagenarian – hats off to you sir, hope i wud be able to achieve what you have. Though at your age , i too would be putting the corpus in FD, ( but for that corpus needs to be built in the first place 😛 ). Currently cannot put in FD, as being in 30% bracket i ll end up with 6% return, may very well open a Kotak Bank account and get 6% savings rate 🙂 , JKD.
Rahul C – thanks for the detailed suggestion but to be honest sir i am a novice investor, sharpe ratio, beta values etc i may not be able to follow track comprehend, thats the precise reason I went into MF, hoping that some ivy league passout mutual fund manager wud deal with all that and get the best stocks in the basket and keep shuffling when tides change, for all that effort i dont mind giving him a service fee… but it doesnt work that way does it…… but i am so glad i started SIPs, the least i got out of it was a forced savings habit.
Just for review sakes, following is my portfolio of funds and the current QE induced rally has suddenly brought my fund basket at 9.5% as compared to 5% when i wrote you on the suggestion box. 🙂 This is what grips me , that when i wud be 60 the % the returns will look paltry 🙁
i did spread out the risk, may be thats y it never went down more than 3% over all.
Fund —————- Gain
HDFC Top 200 1.58
DSPBR Top 100 Equity. 4.08
AGI Gold Fund 7.73
IDFC Premier Equity – A (G) 7.9
Reliance Equity opportunity 11.9
ICICI Prudential FMCG Fund-G 34.3
Reliance Banking Fund – G 1.5
IDFC Sterling Equity – G 10.66
Franklin Prima 8.47
i have kind of decided on atleast how i would review my MF portfolio given the limited financial acument i have.
1) Add a CASH section to the above, ie will shave off profits when i can and keep in the DMAT account itself, like i didnt do anything when Bankign fund was giving me 30% return, no point in putting the profit in Debt funds, dont get tax relief even after 1 yr, plust cost to move in out of fund
2) Will add to the least performing fund from that CASH and any surplus i may have.
3) Add a FMP to the basket, i hope i can SIP into it ( its a MF right ), also do FMP of 13 months on March of every year, (get two years indexation benefit.)
4) Will do the review when i see major market moves ( up or down ), even if i review in 6 months i dont want to leave a fund before a year. may be in that 6 month review i will see which are the best funds to go for in next 6 months if need be.
5) Would love to track fund manager movement, if any one can suggest where to do that, i tried the moneycontrol site but at best you can see which funds a manager is accessing. Though i would say following a fund manager is not a bad strategy, Ruchir Parekh for example until he was managing my AIG gold fund, the fund was great, post that Ruchir has moved to HSBC MIp funds, my AIG has been slacking since and i see good returns on HSBC MIP, ( this is not a rule , just an example i saw, not necessary that it will always work, just a guideline if i can track ).
6) i have realised that over a very long period like 5 or more years, more likely than not, Rs cost averaging does catchup and hurts in long term, i agree you are buying less units when a fund is priced high but i tell you if the fund keeps a sidewise movement for 1 yr or more ( which just happened to me ) all your bottom fishing of the units at cheaper price when the chips were down would go away as your avg cost of acquistion catches up to the current high rate, and just like stocks, i have seen MF NAV go to a High then to a Low then to a High so you never know.
ofcourse i know making good money is never so simple, and no one has found a golden rule if that wud have been the case all of us wud have been millionaires..
thanks manshu and everybody.
Dont be so sarcastic. I have not repeat NOT asked you to put 80% of your corpus in FD,s.I am a finance man and know a little bit about Income Tax and its effect on interest income.
My comments are my own expereince and was never meant as an advice to othersThat is why i started the comments telling all, my age.
I still do not understand why you have not thought of direct investment in Equity.
Resepected Sir – my humble apologies if my comment came out as sarcastic… i am sorry.. i was genuinely appreciating your opinion… please dont take offence none was intended.
thanks for sharing your valuable experience also sir.
I had this in mind when i was writing. Tracking sharpe/ beta etc would be difficult for individuals. Anyway, that is a comprehensive list. I believe even if one tracks 2 of those, he would be in a better position.
Most importantly, overall portfolio asset allocation (3) and Fund manager move (5) should be taken care of.
Now, how to do this? 🙂
Your portfolio’s asset allocation would be simple to track using excel. List down all the investments in your portfolio. While listing, do care that you create 3 broad heads i.e. Equity, debt & Others. Periodically (may be every month end) update the NAV. Thats it- you get the overall allocation in each asset class.
Fund manager change is the 2nd most important thing. Not a big deal to track this either :). As you list the funds- put fund manager’s name by its side. Periodically, (every 3/6 mth) check wether there is any change in fund manager. Moreover, if any of your investment’s fund manager changes- the fund house would send you a detailed note with an option to exit freely. Recently i got a note from UTI mutual fund mentionong that UTI G-Sec fund and UTI Gilt fund were being merged. I got an option to exit without paying the exit load and i availed it.
However, dont be completely dependent on mails from fund houses. there may delivery be glitches.
On your portfolio- point 3- >> FMP’s are closed ended MF, so no SIP available in that. Yet is a good option to invest for short term.
Thank you very much Rahul…. appreciate your help…..
I am slightly confused by the act of re-balancing. Let me summarize my understanding:
– You have decided on an investment horizon – say a 5-7 year period after which you need the money for your kids education, buying a house etc.
– You have chosen to invest in a particular asset class – this asset class can be equity/debt/hybrid/gold for example.
– Once you have decided on your asset class and allocation, you scout and choose mutual funds in this class. You typically pick the best performing funds in the category with a good track record.
– After every 6 months or so you want to track the performance and see if your funds are delivering.
My take on this is simple – it takes a tremendous amount of time, effort and money (in terms of switching costs, exit loads) to be able to do this. If you are not a day trader and a long term investor, one of the basic criterion for measuring the performance of the mutual funds is performance against the indexes. In such a case it is much easier to be invested in Index funds or Index ETFs.
If you want to get out of an asset calls altogether (say you want to get out of equity as it has not really delivered much in the last 4 years), its a different decision altogether.
Post kind of echoes my sentiment at present. I have been investing for 2 years in SIP combination smallcap, midcap, largecap, debt but results are disappointing.How does one know one is not throwing money away? Yes the equity market itself has been bad but does that mean you completely withdraw and put money in Debt and FD or Gold for that matter. How does one make such a call?
Like the gentleman above I am not so market savvy to pick shares(have lot of duds now in my portfolio), would actually love a post from Shiv or you on what factors to use or at least blogs/sites which give tips on the financial indicators one should look for.
When to use SWP-
In my opinion, one should use SWP/ STP for all his equity investments. The concept of SWP does not holds good in Debt as the volatility is very low.
When you decide to divest your equity investments- questions may arise as to when to sell? What if NAV rises after I sell? To eliminate this dilemma- you may utilize the SWP option. Using a 6-12 mth SWP would be suitable for any fund.
A step ahead of SWP is STP through liquid funds. Redemption proceeds would be earning a mere 4% interest in your savings bank account until that gets reinvested. To eliminate this reinvestment risk one can opt for STP into liquid funds. Your investments would slowly accumulate into a liquid fund which earns ~4-5 percentage points higher than the conventional savings account.
Assuming that Sorabh had followed an Asset allocation approach while making his initial investments. The primary motive behind diversifying across asset classes is to limit the downside risk without hindering the upside potential.
Following the above dictum- all the funds in a portfolio may not outperform in a given time period. Some may deliver very good returns while other would disappoint. To overcome that disappointment and to limit the risk, we diversify across different assets. Same has been the scenario with Sorabh- as some of his funds delivered good returns while other suffered losses. Overall his returns averaged out (though at the lower end).
Now, coming to reviewing the portfolio- one must keep a close watch on his portfolio. The way you review your portfolio must depend on the investment duration. Say, your invested in 10 funds with a horizon of 3 Yrs and 6 months has passed since then. Primary characteristics that you should compare (mint it ! compare all the current data but returns with 6 mth back data) are:-
1. Individual funds returns Vis-s-vis their respective benchmark
2. Asset allocation of each fund (Eq, Debt, Others)
3. Asset allocation of overall portfolio.
4. Risk ratios i.e.- beta, semi Std Deviation & Alpha
5. Fund Manager
6. Credit quality for debt Funds & Sectoral allocation for Equity Funds
If funds have been properly selected, you would hardly find any wild reason to reallocate in such a short span. Yet the reasons that should call for a review (not change) in funds should be the following-
1. Has the fund underperforms its benchmark by huge margins (>5 percentage points)
2. If individual funds asset allocation has got a complete swing.
3. Has the overall asset allocation of portfolio changed largely (>5 percentage points in each asset class)
4. Has the risk ratioâ€™s gone adverse i.e- beta changes from defensive to aggressive or alpha goes to negative from positive
5. Has fund manager changed
6. Has the allocation to lower rated papers increased by >10%
7. Has the allocation in each sector changed by >7%
If answer to any of the above , except point 3, is in affirmative, its time to review that fund only. You may opt to keep the fund on review for the next one or two quarters. If no substantial improvement occurs, you may change the fund. When you decide to change the fund- you should invest another good fund in the same category. This will help in maintaining the original asset allocation.
If the answer is in affirmative to point No. 3- its time to restore the original asset allocation. You need to restore the original asset allocation by divesting from over allocated asset class to under allocated one.
I am 83 and dont get pension.Except my wife I dont have any dependents.
I am a long term investor. With this background I give my investment strategy below.I dont know it is good or bad.
About 75% of my savings are in Fixed Income sector like Company and Bank FD,NO MONEY BACK Anniuty in LIC,GOLD ETF, and NCD,s.The interest income I get is sufficient right now to meet my monthly expenses(inclusive of 10% inflation).I have surplus which I invested originally in EQUITY and Mutual Funds.My choice of Eqiuty was mainly well setablished Companies like L&T. TCS,SBI,ONGC , BHEL Etc. Later I have exited from some of these companies and added FMCG companies like HUL,ITC etc.into my portfolio. The reason was FMCG companies were faring better.This was ccntrary to several Experts(?) opinion that the entry levels were very high.Finding mutual funds were not doing very good,I started comparing my returns from Equity with what I would have been my return had I invested the same amount in FD with 10% interest and in HDFC Equity Fund (Growth).My choice using HDFC Eqiuty Fund as my benchmark was it is a an old MF with several years of 5 Star rating.It was also easier to compare with only one MF.I totally made my exit from Mutual Funds.To day My equity investments have given me a return of 18% as against 10% in FD. My Investments in MF would have resulted in 8% loss.