5 Reasons to Review Your Equity/Debt Fund Portfolio Periodically

As written on: 02^nd Feb, 2021

One good thing about investing in India is that there are so many investment schemes to choose from. There are financial products that cater the investment needs of people who come from different walks of life. Gone is the time where people left under the false pretext that is only the elite who can afford investment in market linked schemes. Nowadays, everyone can invest in avenues like mutual funds because more and more investors are becoming aware about these market linked schemes. Thanks to investment tools like Systematic Investment Plan (SIP) investors have the option of investing small amounts at regular intervals instead of exposing their entire finances to volatile markets.

The reason financial planning is essential is because it helps investors determine their short term and long term goals. There are individuals who are worried about their retirement life and want to invest in schemes that may help them achieve capital appreciation in the long run. Retirement planning can be determined as a long term goal and those who do not have PF facilities through their employer should invest in one as early as possible. Retirement corpus, buying a vacation home or accumulating wealth to secure your child’s financial future can be some of the common examples of long term goals.

On the other hand these individuals can also aspire to some short term goals like buying a luxury car, planning a short vacation, or renovating a house. These goals are immediate and investors may have to look for schemes that are able to garner capital appreciation over the short term.

However, in order to get close to these goals, be it short term or long term – investors need to have an appropriate investment horizon as well. An investment horizon is the number of years an investor needs to remain invested in order for the investments to grow and turn into a desired corpus. For long term goals like retirement planning, one may need to remain invested for at least 10 to 15 years. On the other hand for short term goals, a minimum investment horizon of 3 years is required. Investors should accept the fact the investment is a long term journey and if you want to witness your money grow into wealth, you need to give it enough time.

Although there are multiple schemes in the market, every scheme carries a different risk profile. Which is why financial advisors always ask investors to determine their risk appetite and risk tolerance before investing in any type of scheme. A risk appetite refers to the desired level of risk an individual can take with their investments with the hope of achieving some capital appreciation in future. A risk tolerance on the other hand helps in determining whether an investor is willing to take on a particular investment scheme. For example, you may hold the risk tolerance to invest in mutual funds, but only have the risk appetite of investing in debt funds.

The conservative avenues generally do not require investors to carry a large risk appetite. However, these schemes generally offer fixed interest rates which are generally on the low side. On the other hand, there are some investors who wish to give their investment portfolio an aggressive approach. Such investors do not wish to settle with fixed interest rates and are keen on seeking capital appreciation by investing in market linked schemes. Such investors can consider investing in mutual funds.

What are mutual funds?

Mutual funds are a pool of professionally managed funds that invest across multiple asset classes depending on the investment horizon and nature of the scheme. AMCs and fund houses collect money from investors sharing a common investment objective and invest this pool of funds across the Indian nd foreign economies. Mutual funds are allotted units in quantum with the investment amount depending on the fund’s existing net asset value (NAV). The performance of a mutual fund depends on the performance of its underlying assets.

Securities and Exchange Board of India, the regulator of commodities and securities have their own take on mutual funds –

“Mutual funds are a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.”

A mutual fund investor should always diversify their portfolio depending on their risk appetite in equity and debt instruments. Yes, mutual funds are further categorized so that it helps investors in taking an informed investment decision. A lot of people misunderstand as mutual funds to only invest in equity and equity related instruments. However, there are various types of funds like debt, hybrid, index, gold, ETFs as well in which one may invest depending on their investment objective.

What is a mutual fund portfolio?

A mutual fund portfolio generally consists of equity and debt funds. Equity funds are those mutual funds which invest in equity and equity related instruments. A debt mutual fund on the other hand invests in fixed income securities. Depending on its risk profile and nature a debt may invest in debt related instruments like corporate bonds, government securities, debentures, treasury bills, etc. There are times when investors have to rebalance their investment portfolio depending on market movements. In order to determine whether one needs rebalancing on a portfolio, it is mandatory for investors to review their mutual fund portfolio consisting of equity and debt funds at periodic intervals.

Why should investors review their equity/debt portfolio?

Reviewing your mutual fund portfolio is like servicing your car once every six months. Just like a car needs oil, new engine oil, new fuel filter, brake pads etc. and other minor changes every now and then, your mutual fund portfolio too needs servicing. Reviewing your portfolio once every six months has its own advantages. Investors need to know whether the schemes they entrusted their money with are performing as per their expectations. It is true that while creating an investment plan we take everything into consideration before making an investment decision. However, investors need to go back to their plan to examine whether everything is going smoothly as expected or if one needs to take the necessary actions.

Here are 5 reasons why an investor might have to review their equity/debt fund portfolio periodically:

1. Review whether you are planning to remain invested for the long run

Investment is a long journey. It is a game that one needs to play with patience. While investing in equity funds, the last thing you would want is to jump to conclusions and take hurried decisions. Although we are reviewing our investments every six months, some investments might need some more time before they finally start showing their true potential. Especially when it comes to investments in equity funds, these investments need time to grow. That’s because the equity market is volatile in nature and hence even if the scheme may not seem to perform at the moment, in the long run it can offer decent capital appreciation. In fact, equity investments are not to be judged on their short term performance. Also, if one remains invested in these funds for the long run, they might even be able to beat inflation. Hence, when it comes to some investments, review their performance only after a certain time frame rather than taking a hurried decision based on its recent performance.

2. There might be a change in prioritization of financial goals

This is something that is common and one needs to learn to adapt to it with time. There is a good chance that as you grow, your financial priorities might change. There are several factors that may go into this shift of goals. Inflation, rise of other financial responsibilities, job change leading to another country which in turn affecting the standard of living, are only few of the examples which might force an investor to make changes in their portfolio. One may need to even withdraw their investments and redeem their mutual funds if need be. This generally happens when you start financial planning as a bachelor and a few years later when you get married. You are suddenly riddled with financial responsibilities like taking care of your partner’s expenses, investing for your children, for their education, marriage, things you may not have taken into consideration when you started investing as a bachelor/spinster.

3. Review the performance of your funds to their peers

Although it is true that some investments need their own time frame to show their potential, if other schemes that are similar in nature and fall in the same category are faring better, then it may be time to re-evaluate your investments. While evaluating your investments, investors should just not compare their fund’s performance to other funds that fall in the same category, but they should also compare these funds to their underlying benchmark. If the fund has failed to get closer to its benchmark several times before, you may have to re-evaluate your existing investments. If you invested in a mutual fund that comes with a lock-in period, one may stop the investment and change to another fund. However, if you stop investment in such funds investors must try and not redeem their units till the lock-in period is over.

4. Ensure there is enough diversification

The key to successful portfolio building in mutual funds is to not keep all your eggs in one basket. Diversification is necessary as it also helps in balancing the risk of your overall mutual fund portfolio. If one asset class underperforms, it is less likely for all the other asset classes to underperform at the same time in tandem. It is necessary that investors do a periodic check of their mutual fund portfolio and try and make sure that they have made optimum use of diversification by investing in various asset classes and sectors.

5. Keep a check on your SIPs

A Systematic Investment Plan or SIP is an easy and hassle free way to continue investing in a mutual fund without having to manually visit the fund house or AMC. One can decide an investment amount that they are comfortable with and digitally invest this amount in their mutual fund from the comfort of their laptop or a smartphone with a decent internet connection. With SIP all you have to do is inform your bank following which every month on a fixed date, a predetermined amount is electronically debited from your savings account and electronically transferred to the mutual fund. SIPs are considered to be a powerful tool that might help investors fetch capital appreciation in the long run. However, investors should keep a track on their SIP investments at least once every six months and evaluate in order to examine whether SIPs need any modification. Depending on the performance of the mutual fund, investors may increase or decrease their monthly SIP amount.

These were some of the reasons why one must review their equity/debt mutual fund portfolio at periodic intervals. Investors should always do a background check of the fund before investing. Also, it is better to place your bets on a fund that is consistent with its performance rather than investing in top performers.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.