Investors must monitor the performances of funds in their investment basket periodically. Harish took due diligence while creating his portfolio of mutual funds (MFs). He sought his friends' advice, and looked up websites to study the past performances of various funds. He based his investment decisions on performance track records, underlying investment objectives, peer analysis and future growth prospects.
It has been two years. Some funds have yielded dividends. Harish like many other investors is unaware of the performances of all the funds in his investment portfolio. Like Harish, many lose their initial enthusiasm after inducting the funds in their portfolio basket. It is important to monitor the funds' performances and churn your portfolio periodically, especially if some are faring at abysmal levels.
Yes, mutual funds are good investment vehicles that must be held over a long haul. Periodically tracking your mutual funds enables you to determine if your funds are performing on par with its peers and adhering to their original mandates.
Here are a few parameters investors must track:
Fund mandate
Investors make their investment decisions based on a scheme's investment mandate. Investors typically strive to synchronise their risk appetite with the mandate of a fund that they are comfortable with. The fund manager strives to adhere to the stated investment objective and improve performance.
You must read the newsletter sent by the fund houses periodically where underlying portfolio details are revealed. Ensure the fund has not deviated from its original mandate.
An investor with a moderate or low risk appetite seeks a fund that is largely invested in stocks of largecap companies. If the fund manager for some reason has strayed away from the original mandate and is excessively invested in small and mid-cap companies, the investment product is highly risky. It is out of sync with the investor's risk appetite and could be a misfit in his portfolio.
Fund manager
When fund managers are shifted or leave the asset management company or industry, there is a large possibility of a style drift when a new manager takes over.
A significant drift in investment style and strategy could impact your fund's performance and overall returns.
The mutual fund factsheet mailed quarterly discloses the names of fund managers of various schemes.
Portfolio turnover ratio
Turnover ratio is the percentage of a mutual fund's holdings that are sold every year. High turnover means larger fees in the form of brokerage transactions that will reduce the fund's returns. An aggressive fund has greater turnover ratio while a passively-managed fund will be minimum on this dimension.
Consider an aggressive equity growth fund that is heavily tilted towards midcap and small-cap stocks. It is likely to witness higher turnover than a scheme invested in large-caps. A fund manager who has put in tremendous background work and analysis before taking purchase decisions needs minimal portfolio churning.
Sharpe ratio
This is a measure of the excess returns per unit of risk from an investment. It is an indicator of returns delivered per unit of risk borne. Hence, higher this ratio, better the fund.
Tracking error
A divergence between the price behavior of a mutual fund and the price behavior of its benchmark is its tracking error. A fund with lower tracking error is always better.
Track the overall performance of funds in your portfolio vis-a-vis their peers and benchmarks. You can rely on the fund houses' quarterly disclosures in their reports.
Happy Investing!!
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