Mutual funds are a boon for retail investors who want to stay invested in a number of securities but are limited by the capital requirement for a wide variety of stocks/debentures/money market funds.
Mutual funds also help in creating value by using the expertise of the fund manager who chooses stocks on economic parameters, profitability and various other factors, which an individual will not have the knowledge of or have the patience or time of mastering.
Just like a student needs a report card to show progress, so do mutual funds have various parameters of performance which tell you where it’s headed. Selection of mutual fund scheme should not just be based on past returns. One need to check valuations of portfolio, consistency of scheme performance over a period of time, many ratios like sharp, sortino, volatility etc. says about risk and returns and many more things…
Why do you need to Re-balance?
- Drastic changes in an economic environment – While choosing a mutual fund for your portfolio, you choose the category of fund type it is – equity oriented, debt fund, large –cap, mid-cap, or any other kind. However, severe events like the dot-com crash in 2001 or the most recent Brexit. After the dot-com crash, funds with a mandate of investing in IT companies would have seen a severe decline in NAVs. If you had been invested in such funds, your capital would have depleted and this would have called for an exit from the holdings.
- Changes in your own goals – Suppose you were earning a good salary package in your current job and also saving well enough to invest in an equity oriented mutual fund on a monthly basis. Right now the aim is a capital appreciation of your savings which would either stay idle or give low returns in a fixed deposit. However, if the circumstances change and your company lays you off next month, your goal of capital appreciation will immediately change to reserve and sustenance. You will have to stop that monthly investment into the equity fund and keep funds to sustain you for longer duration till you find another job.
- Change in the fund’s strategy – This is a fund’s objective which undergoes changes and it impacts on your portfolio returns determines whether you should stay invested or move your money out. Some funds start out with a specific mandate but might feel along the way that their strategy is not giving them enough returns. One example is UTI Auto Sector Fund which changed its investment objective and was renamed as UTI Transportation and Logistics Fund. If the entry of stocks does not give the kind of returns necessary for your portfolio, you will need to rebalance it.
- Under-performance of funds – Mutual funds do require 3-5 years of the period to give effective returns. Here, it should also be stressed that the investors also make mistakes in understanding the fund’s objective and invest in a fund which does not match his objectives. An underperformance over a period longer than that can be a valid reason for changing the fund. Of course, the efficiency of the fund manager can be garnered by looking at similar funds over the same period of time.For example, we have compared Equity- Banking Funds over a period of 5 years along with the criteria of minimum Rs 500 crores AUM. We find that ICICI Prudential has performed much better than the Reliance Banking Fund. This makes a case for understanding each fund’s management style. These points sound very common and simple but are complex decisions. It always helps to take suggestions from an experienced mutual fund advisor and understand his basis for advising a particular fund. This should be matched with your expectations and then money should be invested.