Investing in a mutual fund is widely known as the best investment choice for building wealth, but merely investing and relaxing is insufficient. If you are a mutual fund investor, you must have noticed the disclaimer that a fund's past success does not guarantee future results. It means you can't rely on a certain rate of return. As a result, when evaluating a mutual fund, you must look past the prior year's results. When selecting a mutual fund, you perform thorough research and analysis before deciding on the best mutual fund for your investment. However, you must regularly evaluate or better yet, rebalance your portfolio to ensure that you get the most out of your investments. When it comes to managing your mutual fund portfolios, it's important to prioritize quality over quantity. Investors are easily frightened and hop on the bandwagon just as the wheels are about to come off when stocks become unpredictable.
How To Evaluate Mutual Fund Performance?
Rebalancing your portfolio of mutual funds helps you maintain your risk level so you need to have a proper asset mix in your portfolio.
The portfolio review helps you to identify investments in your portfolio that are not successful. You can see which investment does not work to re-equalize your portfolio and add investments to meet your requirements.
The performance of reciprocal funds compared to the benchmark index is simple and can be done directly by referring to the fund fact sheet. Investors should always strive to invest in funds with a positive alpha and their relative performance against this benchmark index is denoted as alpha.
The performance of the scheme must also be compared to peer funds in the same category. Although the performance of the benchmark indicators may have shrunk due to exceptional movements within a stock group, the performance against the peer group can be a better index of the performance of the fund.
It is recommended that the investment has to be consistent with its risk profile in the asset allocation of the mutual fund portfolio. Although you may have planned for an optimal portfolio of mutual funds in order to achieve your financial objectives in good time, the following results may not be as expected.
Things To Consider When Rebalancing Your Mutual Funds Portfolio
Revision of goals
Our financial objectives continue to change. Different factors lead an investor to change or add new factors to the existing list. For example, an investor wants to revisit his investments once in a while with the standard of living, inflation, and new financial dependents.
It is necessary to expand your portfolio of mutual funds across sectors. Excessive diversification can result in inefficiency.
Long-term investment needs to be patient. In their own way, every investment idea is unique.
Oversee short-term inconsistencies
In general, mutual funds are risky because markets can become volatile at all times. If the macroeconomic market trends affect an investor's portfolio, due attention is required.
It is recommended that simple investors create a separate watch list of funds that underperform their benchmark or comparable peers. Look for improvement in performance over the next 2-3 quarters based on this list. A consistent underperformance over three to four quarters may indicate that the investment should be shifted to a better option.
Long Term Vs Short Term Mutual Funds
There is no standard scenario as to how often your mutual fund investments should be reviewed or verified. However, yes, you must make it consistent on the basis of your portfolio and goals.
You should examine it once a year for your long-term objectives if you have invested in equity funds. You can review it more often when you get close to the goal. During the evaluation, check the performance of the fund, the AMC or a fund manager, peer performance, and how well the fund performs in different phases of the market.
You should review it more frequently when it comes to your short-term goals. You need to have a check of portfolio credit quality, country rate movements and funds performance e.g., if you have a short-term goal 2 years away and invested in a debt fund.
When it comes to mutual fund portfolio performance, there's a distinction between looking at it and reviewing it. It is entirely up to you how many times you want to review your portfolio; what matters are the parameters under which you will assess your portfolio. Investors should review their portfolios at least once every six months or once per year.
The temptation to make unwarranted impulsive decisions may be enticed by frequent review and monitoring of mutual fund returns. Allowing a drop in NAVs to tempt you to stop SIPs or redeem units from a fund is a bad idea.
It's important to resist the urge to look at the fund's performance every time the market drops or rises dramatically. For an actively-managed equity scheme, patience is required, as the fund must produce returns in the portfolio over a period of 18 to 24 months.