Our mutual fund review tool provides our views on mutual funds. That is – whether a fund is a buy or hold or sell. We do a quarterly review of these views and change them as appropriate. In this article, we’d like to explain how to use the mutual fund review tool and also answer some of your questions regarding our buy/hold/sell calls.
Before that, we would like you to know that there are 4 layers of researched products we offer as far as mutual funds (which is just one of our offerings) go:
- One, Prime Ratings – our in-house MF rating tool. This tells you where your funds stand vis-à-vis their peers.
- Two, MF review tool – this tells you whether certain funds are buy or sell or holds and provides alternatives. We use our Prime Ratings as a base and apply further quantitative and qualitative (portfolio) filters on our Ratings to arrive at this. Hence, our MF Ratings and MF Review tool are not the same.
- Three, Prime Funds – our list of recommended funds that ensures there is variety in fund strategy, the risks do not overweigh return potential and the funds are bucketed in terms of time frame in the case of debt. This list is derived after the first two steps above.
- Four, Prime Portfolios – our readymade portfolios built for a range of goals and timeframes that use mutual funds, ETFs, deposits and other schemes.
What the Mutual Fund Review tool seeks to do
The objective of this tool is to help you fulfill a major requirement of portfolio maintenance – which is to ensure good products are kept and bad products are weeded out. When you use this tool to review your funds, you will know when funds are slipping or when they are improving. At a glance, you will know which of your funds you should be keeping an eye on, and which ones you should weed out of your portfolio.
The tool simply identifies good funds or slipping funds, sometimes well ahead of market. This is not a job easily done even by advisors because unless one is looking and researching active mutual funds closely, it is very unlikely that such trends can be identified.
And if you choose to be with active funds, this is the largest risk you run – of sitting with bad funds!
How and when you can use this tool
- Check whether the funds you hold are buy or hold or sell periodically – ideally quarterly or half yearly and choose to act accordingly.
- Check whether a fund being given to you by an advisor or relationship manager is indeed a good one.
- Check when an advisor or relationship manager asks you to sell a fund, whether he/she is indeed doing the best for you or simply churning your portfolio.
- If you are a do-it-yourself investor and see a fund you hold underperforming, validate your own thought by checking using this tool.
How to interpret our buy/hold/sell calls
When our review tool gives a buy on a fund that you checked, it means you can continue to hold and invest in it. You need not necessarily invest only in funds from our Prime Funds list. The ‘buys’ in your portfolio should do as well. You can dip into Prime Funds when you want to add more funds for diversification or for holding a unique strategy. Please make sure that the fund you invest in is suitable for your time frame.
When we give a hold call, it means you can hold the fund and avoid fresh investments. A hold simply means we are concerned a bit about performance and are watching it, but performance is not bad enough to warrant a sell. Such funds may eventually move to a sell or even a buy. Sometimes a fund may have moved from a sell to a hold, meaning that it is improving. In those cases, too, it won’t directly become a buy (from a sell) as we watch for steady improvement in metrics.
If you run SIPs in these funds, then take a call based on the allocation of this fund in your portfolio. If the amount already invested so far in the fund accounts for more than 20-25% of your total portfolio, you can stop the SIP. Restart the SIP in other similar funds you hold that may have a buy recommendation in our tool. Else, pick from the relevant section in Prime Funds.
In other cases, you can continue with the SIP until the SIP period expires; don’t renew the SIP. If you have very few instalments left to complete in the SIP (say 6-8 months), you can allow this to complete regardless of allocations.
We look at several quarters of performance before giving sell calls. When we provide a sell, it means stop SIPs and exit the fund. Our views on the funds are entirely based on its performance over time and on our assessment of the portfolios’ near-to-medium term prospects and ability to bounce back. It is not based on the fund’s position in your portfolio.
Your FAQs on our Mutual Fund Review Tool
‘X’ fund is a sell (or a hold) in your review tool. But it has done well for me. What should I do?
A fund may have delivered good returns for you, if you have been fortunate with your entry point or time frame of holding. For example, HDFC Equity may still be a great fund for somebody who has built a 20-year portfolio. Our assessment is not based on a fund’s absolute returns. It is in relation to performance of peers. If a fund is steadily underperforming its peers, you suffer an opportunity loss.
In other words, there is a return penalty you pay. This may not show up quickly in your long-term returns, and your own returns may still look good in absolute terms. A 12% return, for example, can be satisfactory until you know that peers actually managed, say, 16%. Our sell call merely points to slippages in fund performance in recent years, and tells you that there are better options. The choice of exiting will be yours.
You have a ‘hold’ on low-rated funds. Why is this so?
Yes, it is true because we do not simply go by ratings to give those calls.
Ratings, with all the fine-tuning that we do, can still mask 2 things: any near-term but steadily trending improvement or any emerging risks. Hence, there is one more layer of analysis before we provide our calls. This might involve looking closer at near-term trends and juxtaposing it with the changes in the portfolio or the reason for a portfolio turning around or slipping.
Why is a fund that is a buy in your review tool not present in your Prime Funds?
We try to achieve 3 things with Prime Funds: keep the list short, provide a mix of strategies and make sure the most consistent ones are not missed.
This does not mean funds outside our list don’t qualify to be in your portfolio. Marginal differences in performance would still mean that funds marked ‘buy’ in the review tool score well above average. If we decide to put every buy fund in our list, it would be unwieldy, confuse you with too many choices, have strategy duplications, and possibly lead you to invest in more funds that necessary.
So, there is no harm in holding and investing in funds that are a ‘buy’ but not in our Prime Funds. If you hold a fund marked buy, and you want to make additional investments, you can go ahead and invest in that fund instead of enlarging the number of funds you have by going for Prime Funds.
Your review tool has a ‘sell’ on my fund. But I don’t want to sell it now. Is it necessary that I sell it now or can I do it later?
The call on whether to sell the fund now, or in phases, or whether to wait will be your decision. You can take the call based on how much the fund accounts for in your portfolio, the tax and exit load that you may suffer.
For example, if a fund accounts for a large proportion of your portfolio, then you may want to consider tax implications and exit in phases. Similarly, if it hasn’t crossed a year, you might first want to stop SIPs and then hold until your investment crosses a year. When exposure is low (less than 10%), then you may not need to wait to do this.
Please note that we will be constrained from providing views on the suitability of the call to your situation. The reason is that as SEBI-registered research analysts, we are equipped and allowed only to provide our opinion and recommendations on products. Providing advisory and tax consulting services would be beyond our ken or capability. Our endeavor in a ‘sell’ call is to simply alert you on poor performance in a fund.
When I am selling and reinvesting, should it be a lumpsum or SIP?
In general, when you exit a fund and shift it within the same asset class – say one equity fund to another equity fund – there is no timing risk. You remain invested in equity – just through another fund. So, it is fine to move it as a lumpsum.
It may bother you if your new fund falls (if the market falls) as soon as you invest, sometimes. Do remember that such a fall would have happened in the earlier fund too. It just seems steeper when a fund falls right after you invest. But remember that your original cost is your first investment and not the new amount. However, if this bothers you, use a 6-12-month STP from a liquid fund to the equity fund to do the shift. Note that you will incur tax on the liquid fund in such a case.
There is no timing issue in debt funds. You can make lump-sum investments here. Of course, this is assuming you’re not making tactical duration calls!
What if your ‘sell’ call later becomes a ‘hold’ or a ‘buy’?
While there is certainly some structure to giving these calls, it is certainly not a cookie-cutter approach. There is enormous thought and debate that goes behind some of these calls that are borderline between a buy and hold or a hold and sell. We try to do this to the best of our ability.
But funds do make some surprising turnarounds after even 2-3 years of languishing. Or, sometimes, we can be caught on the wrong foot. A reasonably structured process reduces the risk but does not eliminate it 😊 Even so, as long as you have moved to a good fund (when our call was a sell), it won’t be a case of opportunity lost.
With all this, we understand that this tool might be confusing for you at times, leading you to write to us several times before you get clarity. We appreciate your patience and have no doubt you appreciate our painstaking effort to respond to every single question, with limited start-up resources and a small team of high-caliber senior analysts. We will continue to work on this tool to make it more intuitive and also provide you more value-add in the recommendation.