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Last Updated : Jan 10, 2013 02:46 PM IST | Source: Moneycontrol.com

Portfolio Monitoring - Key to investment success

When markets perform badly, most of the investors sell their investment in panic. However these kind of haphazard decisions can be avoided by keeping track of investment. Financial advisor Hemant Rustogi advices investors to stay calm during market turmoil and monitor portfolio regularly to fetch great returns.

While it is heartening to see more and more investors following a disciplined approach of investing in equity funds through a Systematic Investment Plan (SIP), it is also quite common to see investors not monitoring their portfolios in a right manner and hence making haphazard sell decisions.

The negative returns are generally attributed to non-performance. Besides, investors who invest without a well defined time horizon often get tempted to make wholesale changes in the portfolio. Needless to say, lack of clarity on what to expect and what not expect from an asset class like equity and impulsive decisions make investors suffer in the long run. It is important for investors to understand that poor or negative returns could just be a result of the way the market behaves during certain time periods and may not require any action on their part.

For example, indices like Sensex and CNX Nifty only reflect the movement in a limited number of stocks. On the other hand, most of the actively managed equity funds generally have quite a few stocks that may not be a part of these indices.  Besides, some of the funds could be having exposure in certain sectors or segments that may not have participated in the rally but have good prospects in the future. 

As is evident, the process of measuring the performance and monitoring the progress of the portfolio as well as the subsequent actions to fine tune the portfolio (if needed) requires an investor to follow a well thought out strategy. If you are an equity fund investor, this is what you need to do:

Make it a habit to monitor your portfolio

Every mutual fund investor must know that once investments are made, monitoring the performance on an on-going basis becomes a key ingredient to ensure success. However, different investors handle this very important aspect differently. While on one hand, there are investors who feel that onus of monitoring the performance is on the advisors who advise them, on the other hand there are investors who go ahead with making haphazard decisions against the advice of a professional advisor.

Although, to a large extent it is correct to expect an advisor to help you with monitoring your portfolio, your own role in this process can�t be undermined. Hence, you must take the responsibility of tracking the performance of your portfolio.

 Remember, there are many funds that under-perform their peer group as well as their benchmarks over prolonged time periods. Besides, not every advisor may be professional enough to accept his error of judgment about certain funds recommended by him. Therefore, as an investor, you need to devote some of your time to monitor the performance of your portfolio.

To identify non-performing funds in your portfolio, you must compare the performance of the schemes in the portfolio with that of other schemes in the same category over different time periods. (Click here to view your portfolio)

Evaluate a fund on long-term performance

You need to hold a fund long enough to evaluate its performance. Many of us err on the side of selling funds without giving them time to show what they can do. That's why the track record of the funds in the portfolio has to be carefully evaluated. To do that, the focus has to be on the long-term track record rather than short term performance. A long-term track record moderates the effects which unusually good or bad short term performance can have on a fund's track record. Besides, longer term track record compensates for the effects of a fund manager's particular investment style.

Evaluate the quality of portfolio of your funds

Another reason for under-performance could be the quality of the portfolio. If some of the schemes in the portfolio do not have a quality portfolio, those might not be able to keep pace with the broader indices as well as their peer group. Remember, getting emotional about non-performing investments or waiting endlessly in the hope of recovering losses can be a fruitless exercise.

For such funds, the right strategy would be to weed them out and reinvest the money in better performing funds. By doing so and re-investing the money in schemes that have better quality portfolio and track record, you can enhance your chances of improving your portfolio returns over time. 

However, while doing so, the priority should be to increase the exposure in good performing existing funds in the portfolio rather than including new funds. Remember, over-diversification is not good for the long-term health of the portfolio.

Follow a strategy to sell

Having a strategy to sell is as important as having a strategy to buy. It is crucial as apart from the non-performance, there can be other factors that might require you to sell your funds. While there cannot be a set formula for determining the perfect time to sell an investment in mutual fund or for that matter any investment, one can follow certain guidelines while deciding to sell an investment in a mutual fund scheme. Some of the guidelines are:

  • Consider selling a fund when your investment plan calls for a sale rather than doing so for emotional reasons.
  • Hold a fund long enough to evaluate its performance. Many of us make the mistake of either holding onto funds for too long or exit in a hurry. You need to do a thorough analysis before taking a decision to sell. In other words, if you take a wrong decision, there is always a risk of missing out on good rallies in the market or getting out too early thus missing out on potential gains. For example, it may be prudent to sell a fund if its performance has seriously lagged its peers for a period of one year or so. The key is to remain invested for a minimum period of one year or so. Sometimes, decisions are based on one year performance which is not the right thing to do as a sudden steep fall in the market can even affect even two/three year returns.
  • Consider selling a fund when it no longer meets your needs. If one has done a good job of selecting the fund initially, this will only be the case if the fund changes its objective or investment style, or if you need a change.

Look beyond the scheme that attracts your attention for investment

While monitoring is crucial, making sound investment decisions too are important. Many a times, especially when we chase performance, we tend to ignore the performance of other funds managed by the same mutual fund. While it is not necessary that all the funds of a mutual fund will perform in a similar manner, it helps to consider the variety of funds on offer from a fund house in case one is required to make changes in line with one' revised investment objective/s or time horizon.  Most fund houses offer a family of funds thereby allowing investors to diversify across different asset classes to achieve different investments objectives as well as to invest for different time horizons. It is much more convenient to move money within the same fund house compared to redeeming from one fund house and reinvesting in some other fund house. Besides, one can avoid the risk of redeeming at one level and reinvesting at a different market level.

Give due importance to time diversification

Time diversification i.e. remaining invested over different market cycles is particularly important for equity investors. It helps in mitigating the risk that you may encounter while entering or exiting a particular investment or category at a bad time in the economic cycle. It has much more of an impact on investments that have a high degree of volatility, such as equity or equity oriented funds. Longer time periods smooth those fluctuations. Conversely, if you do not have the capacity and the temperament to remain invested in a volatile asset class over relatively longer time periods, the right thing to do would be to avoid those investments.  Time diversification is also important even while selecting the right option among stable investments such as short term, medium or long term debt funds as well. 

Hemant Rustagi

The author is the CEO of Wiseinvest Advisors Pvt. Ltd. He can be reached at hrustagi@yahoo.com


First Published on Apr 30, 2012 02:46 pm