Why Should You Monitor Your Mutual Fund Investments?

Mutual funds are investment vehicles managed by professional fund managers and do not require active, day-to-day participation from investors. However, investors can review their mutual fund investments every 6 to 12 months to ensure that they align with their financial goals, return expectations, and risk tolerance, and to stay informed about their performance.

Here’s why you should monitor your mutual fund investments.

1. Check Your Mutual Fund Performance

Investors can evaluate the performance of the mutual fund they invest in by comparing its returns to those of its benchmark. For example, mutual funds that track the Nifty 50 would use the Nifty 50 as their benchmark. This is specified in their scheme documents.

If the mutual fund outperforms its benchmark, A mutual fund outperforms its benchmark when it generates higher returns than the benchmark over the period being compared. If it underperforms, it has generated lower returns than the benchmark over that period. Investors can consider the fund’s performance against its benchmark, category, and investment objective when reviewing the fund.

For passive funds like index funds, investors are recommended to look for a low tracking error, which measures the extent to which the fund’s returns deviate from those of its benchmark. A lower tracking error indicates that the fund’s performance has closely followed that of its benchmark.

2. Check Fund’s Expense Ratio

The expense ratio is an annual fee charged by the fund house to cover the operating and management expenses of the fund. It is expressed as a percentage of the fund’s total assets. The higher the expense ratio, the greater the proportion of the fund’s assets used to meet its expenses, which can lower the real return on investment.

Hence, investors are always advised to compare the fund’s expense ratio with that of its peers.

3. Review Your Asset Allocation

Assess the mutual fund’s portfolio holdings and asset allocation as disclosed in the scheme’s portfolio disclosures. Check if the fund diversifies its investments across different sectors or asset classes, where applicable, as diversification often reduces concentration risk.

For example, if a mutual fund predominantly invests in the pharmaceutical sector and the sector faces a downturn, your investments may suffer.

4. Identify Consistent Underperformance

Review the mutual fund’s past performance to analyse its track record over different periods and assess its consistency. If the fund consistently underperforms compared to its benchmark or category, you can review the reasons for the underperformance and accordingly consider switching to a better-performing mutual fund.

5. Check for Changes in the Fund

If the mutual fund changes its fund manager or investment strategy, it can impact the fund’s performance. If the new fund manager chooses to change the investment strategy, it may not suit your financial goals or investment requirements. In such a case, you may exit the fund or continue investing depending on your preference.

FAQs

Why should I monitor my mutual fund investments?

You should monitor your mutual fund investments regularly to check how your investments are performing and whether the fund's performance aligns with your financial goals.

How often should I check my mutual fund investments?

You must check your mutual fund investments every 6 to 12 months to ensure your investments align with your risk appetite and return expectations.

What should I check in my mutual fund?

When monitoring your mutual fund investment, you must assess its performance, risk level, and expense ratio, and compare these factors to those of its peers.

Can monitoring help reduce investment risk?

Yes, monitoring your mutual fund investments can help manage and reduce risk, as it helps you spot significant negative changes and make informed decisions.