How should new mutual fund investors track their portfolios?

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: October 26, 2021 at 7:39 am

Last Updated on October 26, 2021 at 7:39 am

Arjun asks, “Can you please write an article on how new mutual fund investors should track their portfolios?” Today “tracking” an investment portfolio has become extremely easy. Investors are spoilt for choice and, at the same time, swayed by fancy pie charts and textured graphs. But is this tracking? In this article, let us consider what aspects of a portfolio an investor (new or old) should track and how often.

Finding out how much the funds in a portfolio have gained or lost daily/weekly/monthly, or even yearly is not tracking. It is watching. Being a spectator to portfolio ups and downs is simply a waste of time. Unless we have a clear investment strategy watching the portfolio does not help.

Step to follow before tracking an investment portfolio

Most new MF investors start investing without a realistic perception of the risk and reward involved. They also do not appreciate how much they should invest for their future needs, how to select mutual funds for different needs etc.  So after you start investing, leave it alone and start studying your needs first.

Why am I investing? When do I need the money? Am I prepared to handle emergencies en route on the investment journey? This free ebook would help young earners build a simple financial plan with safeguards with Step by step instructions: Re-assemble Step by step money management basics.

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Once you have a robust framework to manage money, you need not stop your monthly investments each time there is an emergency. You know how to define a financial goal, set an asset allocation for it and start investing.  This is your foundation, and it needs to be strong. Mutual fund tracking can wait! You can now tag your current MF investments, EPF, PPF, RD, FD etc., to different short-term and long-term goals (the above ebook will help with this).

The Next Step is to understand SIP stands for a systematic investment plan. This means you have a system of investment in place. Buying mutual fund units on the same day of the month is not a SIP. It is merely blind automation.

So our aim should be to learn about mutual fund basics with an investment system in mind. This free ebook can be a possible starting point: Mutual Fund FAQ 100 essential Q &A for new investors!

Next, I would recommend new mutual fund investors appreciate mutual fund risk. The mutual fund industry likes to sell dreams. It tries to convince investors that stock market volatility will reduce over the long term; A mutual fund SIP will average volatility.

Their aim is simple: the longer you stay invested, and the more you invest, the more they would earn. Remember our gains are notional while their income (management fee and commission deducted daily is real!). So they are unlikely to paint a realistic picture about MF risks. We need to do that ourselves.

Here are some resources to get started:

With a better appreciation of (equity) mutual fund risks, I would recommend replanning your financial goals with lower return expectations. Let us take stock:

  1. You have financial goals – long-term (above 10Y) and short term (below 10Y – until you have more experience)
  2. You are investing in equity mutual funds only for long term goals (more experience is needed to use any mutual fund for short term goals)
  3. You have an asset allocation in mind and hope to reach here anytime immediately to within the next few years. For example, 50% equity mutual funds and 50% fixed income (EPF, PPF, NPS debt options etc.)
  4. You have reasonable expectations of returns and realistic expectations of inflation.
  5. You know how much to invest for your long term goals based on this asset allocation and return and inflation expectation.
  6. If you can able invest this much, you have a goal to get there asap.
  7. Now and only now, you are ready to track your portfolio.

How to track an investment portfolio

You only need to look at your portfolio once a year, and when you do, the following actions are recommended.

Tools necessary

  1. A good hobby to prevent you from watching your portfolio frequently
  2. A simple DIY spreadsheet. Nothing beats the flexibility of this.
  3. Data from your investment portal or CAMS-KARVY consolidated account statement.

We have two free resources for tracking:

Information necessary

  1. The current value of equity component and fixed income component for each long term goal.
  2. From the above, compute your current asset allocation.
  3. Is your current asset allocation in line with your expected allocation? If yes, nothing needs to be done. If not, a rebalance will be necessary.
  4. Returns of each mutual fund
  5. What is your current portfolio worth for each goal? That is if you redeem all your money today, what can you do with it?  For example, at the start of your investment journey, your corpus will be small. If you redeem it, you may be able to live off it for six months or 12 months. With time this duration will grow.
  6. Information like CAGR, XIRR or absolute gain is of little practical use.

More sophisticated steps like varying asset allocation progressively, graphical representation of current portfolio value vs expected portfolio etc., are possible. More on this later.