How to review your mutual fund portfolio

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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.

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

  1. Jasvinder singh

    Mara pass SBI ka 2 fund ha
    SBI blue chip fund or
    SBI small cap fund
    1000 RS ki sip
    Ha kya ya sahi fund ha
    Ya fund mna 03/03/2021 sa start
    Kia ha

  2. Hello. My day is having SIP from 2009 in Nippon India Value Fund. From 2018 he stopped paying amount (5k Every month). Now the returns are around 11 Percent and he is retired. Although, he does not need money:

    1 . Is it wise to pull out investment and park it in FD since market is at all time high
    2. Start SIP again in the fund
    3. Leave it as it is

    Your inputs in this matter is highly appreciated.
    Thank you.

    1. Hello Sir, You will appreciate that are not advisors and should not provide individual advice on portfolios. Please check our MF review tool and see our call on the fund and accordingly decide to move out or otherwise. thanks, Vidya

  3. Hello Maam
    Very relevant and informative article. Very nicely articulated. Addresses the exact dilemmas (Exit loads, Tax implications, Profit booking etc.) that I was going through for switching out of Under performing funds.

    I have one suggestion for Prime Investor Articles in general. When any new article is written; please provide cross references in the end of the Articles to other earlier articles of relevance. I did observe that references are available in text and sometimes in comments sections. But it would helpful you guys build a reliable and usable cross reference database using keywords, labels and other such metadata. For example an article on GOLD is written it should automatically list the cross references of other relevant GOLD articles at the end.
    I had seen such excellent library of cross referencing in other investing platforms like ET Prime.

    1. Hello sir, thanks, Very valid point. We haven’t worked on it for lack of bandwidth. We will be doing it soon. thanks, Vidya

  4. 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?

  5. 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, In some categories like mid and small cap, yes, it can; if flows are not curtailed. Vidya

  6. Great piece of work mam! Curious to know what are forward looking factors team looks upon.
    Do you use any predictive analytics or pure fundamental approach!

    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

  7. 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


    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 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

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