How to review your mutual fund portfolio

Share on whatsapp
Share via Whatsapp
Share on twitter
Tweet it out
Share on facebook
Share on FB
Share on linkedin
Post on LinkedIn

Every time you need to review your portfolio, no doubt your mind is flooded with questions.

“My fund is underperforming. Should I sell it or not?”.

“How to go about selling it – in one shot or in a staggered manner?”

“How long should I hold an underperformer?

“If I hold a mediocre fund but start SIPs in a fresh one, over time, the number of funds in my portfolio goes up. What to do?”

Before we move on to discussing these questions, to the extent we can, let’s first talk about the review process per se.

How to review your mutual fund portfolio

When and how to review

In our view, it is sufficient to do a yearly review of any portfolio and especially for very long-term portfolios (10 years and over). If you have the time and inclination and if your time frame is 3-10 years, you can consider a half-yearly review.

If your time frame is less than 3 years – honestly, there isn’t much time to course correct except when a fund turns out to be high risk (sudden credit risk event) and you need to exit it. Of course, if you are constantly looking at tactical opportunities, the field is all yours. We are not that equipped to advise you on that.

Next, when it comes to identifying underperformers or upcoming performers, our process is likely different from yours, if you are not following our MF Review Tool. This is why some of you ask us why we are giving a ‘sell’ on a fund that has delivered well for you or why we have a ‘hold’ on a fund that is not doing well for you. We have addressed in brief this at the end of the article. This article is not about how to identify underperformers.

What we have tried to address here is when to act and how.

buy hold sell

Identifying under-performers and acting

  • First, your fund need not be an underperformer if it delivered say 5% or 6% in 2-3 years. It may be that the market too delivered the same. Not your fund’s fault.
  • If your fund has been steadily behind the benchmark for 3 or more quarters (our experience tells us this is a good period) by 3-6 percentage points or more, it is indeed underperforming.
  • Next, you need to see if this is to do with the theme/strategy itself – for example, a value fund may be underperforming the Nifty 50 but it is likely that other value funds are, too. In that case, compare with peers to know if your fund is a poor one among the other underdogs. It is a different call if you choose to exit a strategy. That is more about your portfolio requirement and less to do with the performance of the fund.
  • If your fund has been underperforming its benchmark and peers, your first step can be to stop SIPs. Then start the SIP in similar funds in your portfolio or choose a better one.
  • If you simply stop with the above, it is likely that over a period, you will be left with an unwieldy portfolio.
  • It is necessary for you to review such ‘hold’ funds during your next review and see if their underperformance has worsened (or simply put, have they moved to a ‘sell’ in our MF Review tool. This will be discussed more in our section on – how long to hold ‘hold funds’.

Selling a fund

When a fund has been worsening in its performance in your portfolio or is a simple ‘sell’ in our MF Review tool, it essentially means you stop all SIPs and sell the fund.

Remember there is an opportunity cost in holding a bad fund. Let us give a simplistic example of ABSL Dividend Yield fund which was a sell in our Review tool in December 2019. Assume you had invested Rs 10 lakh 5 years ago in this fund. You continued to hold it instead of moving to an alternate value-tilted fund from our Prime Funds, when you saw a ‘sell’ call in the fund. Today, the amount lost by not switching would be around Rs 1.46 lakh (in just 6 months, yes!). Of course this can vary with time and the nature of market and funds. You have to weight this opportunity cost against the cost of taxes and exit loads.

The issues you are confronted with while acting on this is broadly 2-fold: exit load and taxes. You have another dimension of how much the fund accounts for in your portfolio. Use the pointers below to deal with it:

  • If your equity funds are less than a year old or you have been running SIPs on the fund in the past 12 months, then there is a high likelihood of exit load and short-term capital gains tax (if you have profits). In those cases, you MAY choose to wait to sell the entire units a year later or sell those units that have crossed a year. If tax and costs don’t bother you, you should simply sell and move to the next fund.
  • If your debt funds are less than 3 years old, the same short-term capital gain tax issue, as above, will crop up. But here, it is important for you to take the call on whether you are holding a high-quality debt fund (no risk and at best low returns) or a high-credit risk debt fund. High risk and short residual period of holding (if your time frame is less than say 2 years) is a bad combination and you cannot decide only based on taxes. The risk of capital loss should outweigh all other reasons.
  • If some of you do tax planning, then you may want to set off capital gains and capital losses and time your redemptions accordingly (subject to the above risk in debt funds). This is best done consulting your tax consultant/auditor unless you are well-versed in this.
  • If you have an extremely high proportion of holding (say over 25%) in a single fund, you usually hesitate to do a single shift at a time. Now, technically, when you simply move from one equity fund to another, there is no element of market timing (unless you are out of the market and re-enter after some time) and hence no cause for worry. However, incurring large taxes in one shot may bother you. In such cases, phased exits will help. Otherwise, this is not something that calls for a SIP or STP simply because you continue to remain invested in the same asset class – just that it is another fund now.
  • If your holding in the underperforming fund is small, then you should not bother about all the above and simply exit.

How long to hold ‘hold’ funds?

We stated earlier that you simply stop SIPs in your ‘hold’ funds and wait. Note that if a fund remains a middle order performer and is not terrible, there is no cause to really sell it. However, if you keep doing this over a 15-20-year period, the number of funds in your portfolio will likely swell. In such cases, use the following pointers to exit some of your ‘hold’ funds.

  • When you are rebalancing and you have multiple funds from the same category or style, exit or reduce the ‘hold’ ones first, if there are no ‘sells’.
  • When you do your annual review and the number of funds you have is unwieldly (read our article on how many funds to hold) then exit some of the ‘holds’. Reinvest in like-funds in your portfolio or if there are none, the nearest fund in terms of risk profile. For example, if you had a large & midcap fund and you would rather exit it to consolidate, you can well consider a multicap fund in your portfolio to shift into. It may be marginally less aggressive but there’s no point adding a new fund since your aim is to consolidate. Else, split it between a multicap fund and midcap fund that you already hold.
  • When you need some money for emergencies and need to necessarily draw from your long-term portfolio, the ‘sell’ and ‘hold’ funds can be your first choice. Many of you use the argument that you will book profit in the performing fund first. But you need to remember that MFs are not stocks. A stock that has gone up becomes expensive. A mutual fund that has returned well, may continue to return well as it rejigs its portfolio to find newer opportunities. Track record of consistent performance is more important. The exception to this is sector/theme funds.
  • And of course, if you are with all top-quality funds, then you can always reduce the risky funds (mid and small cap) when you rebalance. But we are talking of ‘hold’ calls here and not about how to rebalance.

Why your best fund may be our ‘sell’

When you write to us asking why your fund is a buy/hold/sell and why we are not giving reasons in the tool, it is because it is not easily answered in one line! And it can’t possibly be done for several hundreds of funds 😊

We use a combination of quantitative metrics (used in our rating) and qualitative and forward-looking factors and sometimes internal debates to arrive at a buy/hold/sell. Our methodology is roughly an 80:20 approach of being process driven: qualitative.

Many of you tend to look at single metric to decide whether your fund is performing well or not. And when you use our MF Review tool (our buy/hold/sell tool) and it does not sync with your own call, we get the following 2 frequently asked questions :

  • why we have a sell on your fund when it has returned well for you
  • why we have a ‘hold’ on a fund that is underperforming for you.

So, here’s the answer: A fund that you have held for long may have delivered great returns for you and may be underperforming in recent years; it may not show up for you. Similarly, a debt fund with very high risk may be a hold or sell in our tool and may have still returned for you. Conversely, a fund that is just turning around may not show up in your portfolio performance but signal us clearly in our research. These may have moved from a sell to a hold.

Suffice to say that we assess the fund’s performance on its own merit and not based on how it performed in your portfolio. That it may have delivered well for you is a matter of timing and of also being oblivious to risks that haven’t shown up yet in your portfolio.

prime funds
Share on whatsapp
Share via Whatsapp
Share on twitter
Tweet it out
Share on facebook
Share on FB
Share on linkedin
Post on LinkedIn

Please note that any specific queries on any of our recommendations will be answered ONLY through email. If you are a subscriber, please mail contact@primeinvestor.in.  Only general queries or discussions will be answered through the comment section of the blog. For full details, please refer to this post – How to communicate with PrimeInvestor.

10 thoughts on “How to review your mutual fund portfolio”

  1. Mam,

    Another question. In the recent session and also in today’s edition of wealth, you had mentioned not to keep more than 20% of total amount in a fund. What is the logic behind this? Is this due to the specific risks with AMC going bankrupt or anything with like that? Can you please throw some light?

  2. Well written article mam. Thanks a lot.

    What is your thought on AUM impacting performance of a fund as part of review across categories (Large, L&M, Mid, Small). Do you believe that increasing AUM impact the performance of a fund?

    1. Hello Sir, Thanks. Think you are imagining us with huge terminals that spew out patterns for us to predict! Just kidding 🙂 The truth is we don’t know any other way than the old world style fundamental approach 🙂 What we try our best though, is to hone our skills and also importantly learn from what history teaches us. Thanks, Vidya

  3. Hi Vidhya,

    Thanks for said article and always helping in upgrading knowledge. My question is in Mutual fund review tool fund is on hold and in ready portfolio (Emergency Fund) fund name is available to invest.

    Axis liquid fund and UTI Liquid fund pls guide what to be done and also SIP in both fund not available still ready portfolio consist it.
    I had marked mail and got other option but those funds are also mentioned as hold in Review tool?
    Pls guide

    Thank
    Bhavin.

    1. Hello Sir, all liquid funds in our tool are a hold unless they are a sell. This is because the different between them is too subtle to make any significant buy/hold call. So a hold means they are fine for bying or holding. We have mentioned that in the notes to the review. In future, please write to us for any query on our product, using https://primeinvestor.in/contact-us/ so that we have record of your mail through tickets. thanks, Vidya

    1. Hello Sir, Thanks. I just realised the last part on the article (in a box) did not appear on the blog earlier. Sorry about that. I have updated it. please go through it too. thanks, Vidya

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

The essence of PrimeInvestor

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

Legal Disclaimer : Redwood Research (with brand name PrimeInvestor) is an independent research entity offering research services on personal finance products to customers. We are a SEBI registered Research Analyst (Registration: INH200007478). The content and reports generated by the entity does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. All content and information is provided on an ‘As Is’ basis by PrimeInvestor. Information herein is believed to be reliable but PrimeInvestor does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. The services rendered by PrimeInvestor are on a best effort basis. PrimeInvestor does not assure or guarantee the user any minimum or fixed returns. PrimeInvestor or any of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates will not liable for any losses, cost of damage incurred consequent upon relying on investment information, research opinions or advice or any other material/information whatsoever on the web site, reports, mails or notifications issued by PrimeInvestor or any other agency appointed/authorised by PrimeInvestor. Use of the above-said information is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. All intellectual property rights emerging from this website, blog, and investment solutions are and shall remain with PrimeInvestor. All material made available is meant for the user’s personal use and such user shall not resell, copy, or redistribute the newsletter or any part of it, or use it for any commercial purpose. PrimeInvestor, or any of its officers, directors, employees, or subsidiaries have not received any compensation/ benefits whether monetary or in kind, from the AMC, company, government, bank or any other product manufacturer or third party, whose products are the subject of its research or investment information. The performance data quoted represents past performance and does not guarantee future results. Investing in financial products involves risk. Mutual Fund Investments are subject to market risk, read all scheme related documents carefully. As a condition to accessing PrimeInvestor’s content and website, you agree to our Terms and Conditions of Use, available here. This service is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Redwood Research or its affiliates to any registration or licensing requirement.

• Aditya Birla Mutual Fund • Axis Mutual Fund • Baroda Mutual Fund • BNP Paribas Mutual Fund • BOI AXA Mutual Funds • Canara Robeco Mutual Fund • DSP Mutual Fund • Edelweiss Mutual Fund • Essel Mutual Fund • Franklin Templeton Mutual Fund • HDFC Mutual Fund • HSBC Mutual Fund • ICICI Mutual Fund • IDBI Mutual Fund • IDFC Mutual Fund • IIFL Mutual Fund • Indiabulls Mutual Fund • Invesco Mutual Fund • ITI Mutual Fund • Kotak Mahindra Mutual Fund • L&T Mutual Fund • LIC Mutual Fund • Mahindra Mutual Fund • Mirae Asset Mutual Fund • Motilal Oswal Mutual Fund • Nippon India Mutual Fund • PGIM Mutual Fund • PPFAS Mutual Fund • Principal Mutual Fund • Quant Mutual Fund • Quantum Mutual Fund • Sahara Mutual Fund • SBI Mutual Fund • Shriram Mutual Fund • Sundaram Mutual Fund • Tata Mutual Funds • Taurus Mutual Funds • Union Mutual Funds • UTI Mutual Funds • Yes Mutual Funds

Equity: Large Cap Funds | Mip Cap Funds | Large And Mid Cap Funds | Small Cap Mutual Funds | Contra Mutual Funds | Dividend Yield | Focused Mutual Funds | Find Top Index Funds | Best Sector Funds | Thematic Mutual Fund | Best Value Mutual Funds | Equity Linked Savings Scheme | Tax Saving Funds
Debt: Banking And PSU Funds | Corporate Bond Funds | Credit Risk Funds Mutual Funds | Dynamic Bond Funds | Floating Rate Funds | Gilt Mutual Funds India | Find Top Liquid Funds In India | Long term debt funds | Low Duration Funds Debt Funds | Medium Duration Debt Funds | Medium To Long Duration Funds | Money Market Debt Funds | Overnight Debt Funds | Short Duration Debt Funds | Ultra Short Term Debt Fund
Hybrid: Aggressive Hybrid Funds | Arbitrage Mutual Funds | Balanced Advantage Mutual Funds | Conservative Hybrid Funds | Dynamic Asset Allocation | Equity Saving Funds | Multi Asset Funds | Multi Asset Allocation

Scroll to Top
Login to your account