by Mr Deepak Jasani, HDFC
Securities.
Investing in mutual funds should ideally be
for the long term.
However, it is essential to periodically
review the performance of the schemes by studying the historical returns of
that scheme and comparison with the returns of benchmark / category that the
schemes belongs to, over the same period of time.
If you do not do this, you may not achieve
your earlier planned goals in time. Ideally, this exercise should be conducted
every 6 to 9 months.
1. Performance of schemes
Historical absolute returns of the scheme
(over different periods, say, 6 months, 1, 3 and 5 years) can give a sense of
how the scheme has been performing. Returns during various market cycles should
be studied as opposed to just comparing point-to-point returns. If the absolute
returns are consistently below par or expectations, then there could be a risk
of investors’ goals not being met at all.
The next step would be comparing the scheme’s
performance with that of the benchmark and category to which the scheme
belongs. By studying the returns vis-Ã -vis benchmark, investors will understand
whether the scheme has generated enough premium to justify the cost of the
actively managed scheme as opposed to simply tracking the benchmark through an
exchange traded fund (ETF).
Comparing with category returns will help in
understanding if the outperformance (or underperformance) is attributable to
the entire category or just the scheme alone or a bit of both. If the scheme
has consistently underperformed, then it is time for the investor to switch out
of the scheme to better performing ones in the same category.
2. Assess the risk..!
The investor should also assess the risk that
was undertaken to earn those returns. This can be done using various measures
like Sharpe, Treynor Ratios, Standard Deviation (SD), etc. Out of these, SD is
a simple yet comprehensive risk measure and gives a fair idea of the risks
involved in earning the expected returns.
The investor should compare the scheme’s risk
along with that of the category average and whether this is in line with his
expectations and/or his own risk profile.
Portfolio turnover ratio is a measure of
churn within the portfolio; i.e., how much has the fund manager bought/sold as
compared to the total assets under management of the scheme.
In schemes with particularly high turnover
ratios, investors should assess whether it has resulted in any excess returns.
3. Asset allocation changes..!
Another factor to consider would be asset
allocation changes at the investor level that have occurred after the original
investments. This can happen since not all asset classes grow or decline at the
same rate.
The investor should make sure that his
current asset allocation is in accordance with the originally intended
allocation.
Investors in sectoral or thematic funds or
investors having a particularly large exposure to a specific segment of the
market need to be extra careful since they are exposed to unsystematic risk as
well.
Assessing the macro events pertaining to the
sector like regulatory changes, changes in economic conditions should help the
investor to estimate the future prospects of the sector/theme to a certain
degree.
For example, currently, the IT sector has run
into headwinds due to structural changes, rupee appreciation and changes in
visa policy.
Investors should also assess if any
particular segment that he is invested in is trading at high valuations which
might be an indicator of the forming of a bubble in the sector.
In such situations, one can make use of the
PE ratio of the particular sector/segment and compare it with its historical
average and also against the Nifty 50 index to assess if it is trading at
particularly rich valuations.
Review does not necessarily mean exit or
switches. It is mainly meant to be aware of the emerging situation and taking
necessary steps (only in case of major deviations) to fall in line with your
original risk return profile and financial goals.
About the author
The Mr. Deepak
Jasani writer is head, Retail Research, HDFC Securities.
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