Excerpts:
What’s the starting point for tracking performance?
Arun Kumar: A common mistake is starting by focusing on individual funds. Instead, start by assessing the entire portfolio. Set a review frequency of 3 to 6 months, ideally 6 months. First, analyze overall portfolio performance for 1, 3, 5, and 7 years, giving more weight to longer periods. One-year performance is often noise but can indicate short-term outliers. Use a benchmark that aligns with your portfolio (e.g., 70% equity, 30% debt), not just a pure equity index like Nifty 50. After reviewing the portfolio, drill down into asset classes like equity, debt, and gold, and compare them with relevant benchmarks. Finally, analyze individual funds against both broad (e.g., Nifty 50) and specific fund-level benchmarks.
How often should short- and medium-term investors check?
Arun Kumar: Six months is still a good timeframe, even for short- and medium-term investors. Fund changes typically don’t happen within short periods, but keep an eye on any major shifts like management or style changes. A quick review every three months is fine, but a detailed review every six months should suffice.
How can you easily determine if your fund is underperforming compared to the benchmark, including sectoral mutual funds?
Arun Kumar: Do the comparisons to understand the performance.
MFs: Use tools to compare the fund’s returns with a broad index like Nifty 50 or Nifty 500 over 3, 5, and 7 years. This gives a basic idea of performance.
Benchmark Comparison: Identify the relevant benchmark for each fund. For mid-cap funds, use Nifty Midcap 150; for quality-focused funds, use a quality index. Compare the fund’s performance with both the broader and specific benchmarks.
Contextual Analysis: If the fund underperforms the broader index but not the specific benchmark, the issue might be with the style or sector, not the fund itself. For example, if a mid-cap fund underperforms but the mid-cap index does too, it may be a sector-wide issue.
Fund Manager Insights: Check the fund’s website or recent interviews by the fund manager for explanations on performance. If the fund is consistently underperforming and lacks transparent communication, this is a concern.
Additional Factors: Watch for changes like new fund managers or significant portfolio shifts. High turnover or instability in the fund house can also affect performance.
Are there specific ratios or data points to consider when evaluating mutual fund performance?
Arun Kumar: While there are various ratios, such as Sharpe Ratio or Alpha, they often don’t capture the full context of performance cycles and style differences. For instance, a fund may look underperforming based on ratios but could turn around if the market or style shifts. Instead of relying solely on ratios, consider the fund’s performance relative to its style benchmarks and overall market conditions. Evaluating the fund’s adherence to its strategy and the broader investment cycle can provide a more nuanced view.
Is evaluating sectoral and thematic funds different from diversified funds?
Arun Kumar: Yes, the approach varies:
Diversified Funds: Diversified funds benefit from time. Investing in different styles (e.g., quality, growth, value) helps balance performance over the long run. Even if one style underperforms temporarily, others will likely compensate. Focus on whether the fund stays true to its investment style. Over a 7-10 year period, a diversified portfolio with varied styles generally performs well, despite temporary underperformance in some areas.
Sectoral and Thematic Funds: These funds require precise timing. They can underperform or outperform based on the sector’s business cycle and valuations. For example, infrastructure funds might lag during downturns but excel during upturns. Evaluate where the sector stands in its valuation and business cycle. Enter when valuations are low and the cycle is turning positive; exit when valuations are high or the cycle peaks. Compare the fund’s performance to its sector index. Ensure the fund aligns with the sector’s fundamentals.
What advice would you give investors tracking mutual fund performance on their own?
Arun Kumar: Sure, there are a few points to consider while tracking your portfolio performance.
Avoid Performance-Only Focus: Don’t judge a fund solely on performance. All funds, especially diversified ones, will have periods of underperformance.
Assess Investment Style: Determine if the fund is adhering to its stated style or approach. Compare it with relevant benchmarks and other funds of the same style.
Good vs. Bad Underperformance: Understand if underperformance is due to temporary style issues or if it signals a problem with the fund. Evaluate if the style itself is out of favor or if the fund is lagging even within its category.
Sector and Thematic Funds: For sector-specific funds, extreme performance (both high and low) can be a signal to adjust your investments. Outperformance may indicate overvaluation, while underperformance might present a buying opportunity.
Disclaimer: Please note that these are not recommendations. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.