Should you actively manage your mutual fund portfolio?

Vidya BalaFundsIndia.com

‘Oil prices have gone up and rupee has depreciated. Should I change my mutual fund portfolio?’ ‘My fund has capital goods and engineering stocks. Should I change the fund?’ ‘The US may hike rates and they say FIIs may exit the market. Should I move out of equity?’

These are some of the questions we are often confronted with, from investors. It is, no doubt, heartening to note that investors track broad economic events and would like to see their portfolio benefit from it.

And then there are others who want funds with sector exposure exactly the way they like it or want high exposure to small sub-themes (small relative to the listed universe) such as defence, renewable energy, railway and so on and do not like to see the usual banking or IT or pharma in the top sectors that a fund holds.

Here are a few points that you need to keep in mind when you invest in mutual funds and then decide to take ‘excessive’ charge of our portfolio based on every single event in the economy or wish to make the best of every opportunity that seemingly presents itself:

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Vidya Bala

Head- Mutual Fund Research|FundsIndia.com

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You have a fund manager running your fund

If you invest in a mutual fund, you agree to let the fund manager do the choice of picking stocks and managing them for you. It you wish to have certain specific stocks or certain sectors in your portfolio, then you would only have to build your own portfolio of stocks. But remember that the very purpose of investing in mutual funds is to do away with the hassle of having to build and track your own portfolio, especially with equity funds. When you have an expert doing the job for you, sitting on top of it to micromanage, may only get chaotic.

No funds for every theme

There are theme funds and sector funds but not one for every theme or sector. For instance, a fund with chemicals and fertilizers or say ports as a theme would not be available for the simple reason – there are not that many stocks in the listed space to run such a fund. Besides, these themes do not receive much weight (because they are few in numbers) in key indices. Hence a fund house may not be able to exclusively run a fund for themes that have less presence in the listed space.

However, what many theme funds do offer is provide a flavour of such micro themes within a broader theme. For instance, ports may be part of an infrastructure fund, defence as part of a capital goods and engineering theme and chemicals and fertilizers as part of a consumer theme. Hence, you may need to settle for the micro themes you ask for, by choosing a broader theme fund.

A Diversified fund’s portfolio is not static

Sometimes investors look for diversified funds that have exposure to sectors, the way they want it, or hold some micro themes they wish to take exposure to. This is where it gets tricky; for you start looking for a fund that will have highest weight for the theme you are looking for. This may not always happen.

A diversified fund cannot completely ignore key sectors (banking, energy, IT, pharma and so on) that receive maximum weights in the index and instead choose smaller sectors. They may go a bit underweight (that is taking slightly lower exposure to the sector than the index) or overweight on the sector. Ignoring it may prove to be costly if the index moves. Even if you do manage to spot a fund with the exposure you seek, remember, the portfolio is subject to change. The fund manager may dynamically manage the portfolio and may rejig it after you invested in the fund. Hence, to expect a diversified equity fund to provide you with certain thematic exposure is not a practical proposition.

So what do you do when you wish to invest in your chosen themes – when there are no such theme funds?

Let’s be candid. If you are really keen on owning some micro themes, it is best you own a couple of good stocks in that theme, if you know how to pick one, track it and exit it. But if you are a regular mutual fund investor, just remember, the fund manager, very likely, is tracking the reforms/changes in the macro environment and their impact on stocks/sectors more than we do.

Hence, he/she would be tweaking the portfolio to tap into such potential. If this be the case, there may be little point in further trying to manage an expert-managed portfolio! Besides, if the idea of investing in mutual funds is to manage less, then little point in sweating it out.