Every investor knows that the only parameter they can control on their investment portfolio is asset allocation. Even Warren Buffet gives capital allocation top priority, over anything else. So, it doesn’t matter if you are a retail investor or a billionaire investor, the fundamentals of investing remain the same.
Many investors tend to get anxious after they invest in mutual funds. They check their portfolio frequently. For some people, this frequency can be once a month, while for some others, it can even be every hour. Here are the three most common reasons, investors find themselves checking their portfolios:
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Are investments performing as per expectations?
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Is everything moving in the right direction? Based on the current news, is there any opportunity to leverage?
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With updates in technology, checking mutual fund portfolios is the easiest among investment products.
However is there a need to check your portfolio every hour, week, month, or year? How can reviewing your mutual fund SIP help to gain higher returns? Read on to find out.
What is the need to monitor performance?
Investing in mutual funds is popularly recognized as the best investment choice for wealth creation. However, only investing and waiting for returns is insufficient. Mutual fund investors must know that a fund’s past success does not fully determine future results. Thus, you shouldn’t bank on a specific rate of return.
When you evaluate a mutual fund, look at much more than the previous year’s result. Before investing, perform a thorough study and analysis to choose the best mutual fund for your portfolio.
The changes in your investment portfolio are your risk appetite and asset allocation. Whether the market remains highly volatile or it is the year of bull-runs, your asset allocation ratio changes. Thus, you need to focus on one thing, and that is asset-allocation rebalancing.
How to assess mutual fund performance?
Asset allocation rebalancing assures good returns while leveling out risks. It involves the reallocation of funds to achieve the right asset mix. When you decide to rebalance your assets, you can evaluate their performance on the following parameters:
- Stock quality
The stock’s quality indicates the fund’s ability to earn good returns. You can evaluate the performance of a scheme with the help of a qualitative analysis of stocks and their historical performance. Such analysis concludes that quality stocks have higher chances of outdoing other funds in the long run, particularly during a volatile market.
- Benchmark index
An excellent way to compare performance is by comparing the returns from mutual funds against the market benchmark index. A benchmark index takes into account the best-performing stocks. An investor can measure how well a fund is performing by looking at the fund fact sheet. One should try to invest in mutual funds with a positive alpha, where alpha denotes the fund’s performance against the benchmark index.
- Peer performance
Taking a look at the performance of peer funds is a standard to help compare and determine the effectiveness of your portfolio. This is a better index to evaluate the performance of a fund as compared to the benchmark index.
- Non-performers
When you review your mutual fund SIP, you understand which assets are underperforming or non-performing. You can adjust your portfolio after your assessment and add investments that help you meet your financial goals.
- Expected returns
Risk-adjusted return helps investors choose low-risk funds from the group. You may have planned to fulfill your financial goals in good time. However, if your asset allocation is not in line with your portfolio’s risk profile, the results will not meet your expectations. The lowest risk ratio fund has the highest risk-adjusted return.
Long-term vs. short-term mutual funds - how often should you review your portfolio?
There is no definite guideline on how often you should review or verify your investments. However, you must also get into the practice of doing it consistently based on your portfolio and objectives.
If you have invested in equity funds, you should assess the portfolio once a year for long-term goals. When you are about to reach the goal, you can increase the frequency. During the assessment, make sure you check the fund’s performance, AMC or fund manager charges, peer performance, and the performance of the fund in different market phases.
If you have short-term objectives, you must review the portfolio more frequently. You must check the fund’s performance, portfolio’s credit quality, country rate movements, etc.
In conclusion
When you talk about mutual fund performance, there’s a difference between looking at it and reviewing it. The frequency of review depends on you entirely, but what you need to take into account is the parameters that you will use to evaluate your portfolio.
If you frequently review your portfolio, there are chances of making impulsive decisions. A fall in NAV can tempt you to redeem units or stop SIPs, which can be a bad investment idea.