How to review a mutual fund portfolio

I discuss simple ways in which a mutual fund portfolio associated with a long-term goal can be reviewed. This is a grey area in personal finance and there is no optimal way to do this. Each individual must necessarily develop their own style of review.  So multiple solutions are the norm here.

This post is about reviewing an existing equity portfolio and not about creating a new one. To create a new one, you can consider reading, Minimalist Portfolio Ideas for Young Earners

Should a mutual fund portfolio be reviewed?  Yes, but I think an active mutual fund should be monitored at least once a year, but given at least 5 years* to 'perform'. Perform here refers to beating its benchmark and not faring among the best in the category.

* a personal definition. Yours could be 3 years.

If the fund has not beat its benchmark, then the reasons must be investigated before thinking about making a change:

  • If the fund has not beat its benchmark during a period (say, 5Y) in which the benchmark went up, chuck it!
  • If the fund is moving south when the benchmark is moving north, chuck it (can be even after 1-2Y)
  • If the fund has not beat the benchmark, but has stayed close to it, find out how funds of similar age have performed.
    • If they have fared better, then you can consider a shift (the situation may reverse after you exit!)
    • If they too have not done well, you either 'stay put' or consider a newer fund with a short, but impressive history. Again, could turn out to be a mistake!

Please recognize that fund selection and fund switches are arbitrary beyond a point! You take a chance and hope for the best.

How do I switch? 

This is a common question among investors. 'What do I do with current holdings? Do I leave them as is, and continue fresh investments in the new fund? Or do I switch out completely?

In the interest of maintaining a clutter-free portfolio, I would recommend a complete but gradual switch out, keeping exit load and taxation in mind wrt existing units. However, this is easier said, than done.

Types of mutual fund reviews

We review our holdings for many different reasons:

  • we may just realize that we are holding 20 funds instead of just 1/2 which would do.
  • routine annual review
  • review to decide on how to reduce equity exposure as goal approaches.
  • rebalancing, tactical moves etc.

Example of a mutual fund review

What is presented below are my thoughts on the subject and is a combination of 'how I do it' and 'how I would do it'. Let us start with assumptions.

  1. The goal is several years away (short-term goal management is a different ball game. It the folio has debt, then there is not much to do. If it has a lot of equity, one should pray a lot!)
  2. We have a clear expected return from our total equity folio (this review is for the equity portion of the folio. We will assume the debt part has minimal volatility and does not need frequent reviews)
  3. Action here refers to fund changes only. Other actions like rebalancing or tactical asset allocation depend on equity:debt allocation or economic indicators and are not considered.
  4. The entire portfolio should be at least be 5Y old. There is no hurry for new investors with folios younger than 5Y to take any action and I strongly suggest they monitor their investment patterns and not the folio performance.
  5. We will monitor the folio, say each month but will only take action once a year after we have been investing for at least 5Y.
  6. There are several types of folios (minimalist, mildly cluttered, severely cluttered). So course of action will differ. We will consider a cluttered folio. It is easy to extrapolate the gist of the argument to any folio. If you have any questions, feel free to ask.

Pretty much every action in personal finance needs a benchmark. The more personal they are, the easier it is to decide.

So the first benchmark is to have a return expectation. This  expectation should be reasonable and must keep in mind associated volatility. The folio may have a net return much lower than expected for several months and at times years.

The second benchmark is the net return from the portfolio at any given time. This is calculated using what is known as the XIRR (read more about this here)

The XIRR is, by definition a personal benchmark. 'How has the fund performed?' is now quantified by, 'What is my XIRR from the fund?'

It is a personal benchmark because no two people's XIRR will be the same, unless they invest on exactly the same dates.

This is why star ratings are irrelevant once I invest in a fund (they are irrelevant even before that because, imo they do not reward/penalize long-term consistency/inconsistency. An investor is better off  doing their own analysis).

Once I invest in a fund, all that matter to me is its impact on my folio and not how it compares with its peers (star rating).

So, once I have an expectation from equity, the next task is to find out the net XIRR (this is the rate at which all your investments have compounded on an average. This is the equivalent of the CAGR when multiple investments are made).

You can do this by entering ALL your transactions in a portal like Value Research or my mutual fund tracker or Mprofit. Not sure if Perfios gives this.

You should now have a table of the current value of all your funds, their individual XIRRs and the net XIRR.

Something like this (click to enlarge). This is a fabrication.

Example 1
Mutual-fund-portfolio-review-5Mutual-fund-portfolio-review-4The portfolio weight (fund value/portfolio value) is plotted against the XIRR (x-axis). The black line represents the next XIRR.

Seen near Brick Lane.
Photo Credit: Garry Knight

The black line can be thought of as the fulcrum of a seesaw. In diversified portfolio, some funds will always have a return lower than the net XIRR, but the fulcrum is positioned in such a way that the seesaw(the portfolio) is held steady instead of tipping either way.

The above portfolio is heavy on large caps. So the obvious choice is to reduce large cap exposure. There is a large cap fund with 11% weight and 8% return. That can be redeemed and invested into the large cap fund with 4% exposure.

Any non-unique fund that is at least a few years old (in your folio), and has an XIRR that is well below the net XIRR can be considered for removal.

Further trimming is possible, but there is no need to make unnecessary changes. Most portfolios would be far from perfect. They can be gradually modified.

Example 2. The above example was modified for simplicity. These are the actual numbers. What do make out of this?

Mutual-fund-portfolio-review-1

Mutual-fund-portfolio-review-2

The choice here is not so straightforward. If you want to trim down the folio, deeper study is required along with some ruthless changes. I would personally leave this be for a while.

One can also consider using the Moneycontrol edition: Equity Mutual Fund Portfolio Comparison Tool to check for significant overlap. If this is pretty high, say above 40% and the top holdings identical, then one of the funds can be removed.

Instead of switching out, one could also leave the existing units alone invest in other funds. Soon the portfolio weights of the laggards will decrease and not make much of an impact. The fulcrum will shift!

The idea of this post is to point out the importance of making a table as the one shown above. This offers a better perspective of the movers and shakers of the folio. This makes it easy to decide the next course of action.

I like a large XIRR as much as any other person. So a second approach is to try (and hope) to keep the net XIRR well above the return expectation and make gradual changes to increase the distance between the two benchmarks (expectation and net XIRR) as much as possible.

That is, one could try and move the black line to the right by increasing weights of the funds with have returned the highest. This has to be done without affecting diversification.

One cannot accomplish this with knee-jerk changes.  The idea is to do it with a method and to do it gradually. Not having an SIP helps in this regard. Monthly investing can still continue.

It is best to not get emotionally attached to a fund and to be ruthless, but objective. This is something I am not very good at, but have changed in the past couple of years.  Ruthless does not mean immediate. Change can take a few months to happen. After all, exit loads and taxation are also important.

Changes can hurt. The fund we exited can go on to do quite well and the new fund plumb new depths.

What is proposed above is only one of a zillion possibilities. The idea of this post to highlight the importance of personal benchmarks. There are many solutions to this problem. Personally, I prefer benchmarking XIRR of each fund with the folios net XIRR. Feel free to critique and propose alternative strategies.

If the portfolio was minimalist to begin with, nothing need be done as long as the net XIRR is close to above our expectation from equity for a particular goal. This is the sweet spot, Ashal Jauhari finds himself in 🙂

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40 thoughts on “How to review a mutual fund portfolio

  1. Srinivasan

    i think that perfios does provide a report that can help. the name is something like mutual fund benchmark comparison report. 1 year, 3 year and 5 year results are shown. the report seems to track the performance of the actual transactions and not the fund, and compare it with the relevant benchmark(s).

    Reply
  2. Srinivasan

    i think that perfios does provide a report that can help. the name is something like mutual fund benchmark comparison report. 1 year, 3 year and 5 year results are shown. the report seems to track the performance of the actual transactions and not the fund, and compare it with the relevant benchmark(s).

    Reply
  3. Srinivasan

    My previous comment was from a phone and a bit terse. From my analysis, the 'mutual funds summary tab' in perfios tracks the XIRR from the actual transactions and hence the investments, rather than the fund itself. So it is possible to get a table similar to the one cited in the post and do the first level analysis of XIRR against the expectations. The 'MF Portfolio Schemes Vs Benchmark Performance Report' seems to give the performance of the scheme with respect to the relevant benchmark(s); this can possibly be used to evaluate the scheme against the benchmarks. I have seen the report list more than one benchmark as required - e.g Franklin Prima is compared with both CNX 500 and CNX Midcap.

    Reply
  4. Srinivasan

    My previous comment was from a phone and a bit terse. From my analysis, the 'mutual funds summary tab' in perfios tracks the XIRR from the actual transactions and hence the investments, rather than the fund itself. So it is possible to get a table similar to the one cited in the post and do the first level analysis of XIRR against the expectations. The 'MF Portfolio Schemes Vs Benchmark Performance Report' seems to give the performance of the scheme with respect to the relevant benchmark(s); this can possibly be used to evaluate the scheme against the benchmarks. I have seen the report list more than one benchmark as required - e.g Franklin Prima is compared with both CNX 500 and CNX Midcap.

    Reply
    1. Prakash Warty

      The report in Perfios gives the return of the fund against its benchmark and not my investment's return by XIRR. However, the return shown in the report for a fund differs from the return shown in Valueresearch.

      Perfios has another problem. It shows the XIRR for each fund by the folio number and not aggregated by the fund name.

      Reply
  5. Karthikeyan

    Sir, I wonder if portfolio rebalancing and diversification with an asset class (say equity) is another way to review a mutual fund portfolio.

    Lets say that I'm invested in 4 different equity funds (mix of large & mid cap). All of them are invested in multiple sectors, but some are more skewed to a certain sector (by design of the respective fund manager). My goal is to rebalance the portfolio in such a way that my exposure to any sector is limited to 15%.

    Here are the steps outlined for this process -

    1) Find out the top 10 sector weights for each fund in the portfolio
    2) Establish your monthly SIP amount
    3) Find out the SIP weights to be allocated for each fund that ensures that exposure to a specific sector is limited to 15%. This represents your ideal portfolio allocation
    4) Find out the weights of your current portfolio
    5) Rebalance accordingly either through switches, STPs or subsequent SIPs.

    Downsides? Fund manager may change his/her portfolio allocation next month
    Assumptions? Portfolio allocations don't change drastically

    Reply
    1. freefincal

      I think it is better to have funds in the folio with narrow investment mandate. This will ensure minimal overlap If there is overlap to begin with, then that must be taken care of first, beforing other evaluations. Rebalancing is for reducing volatility and not part of the review process.

      Reply
  6. Karthikeyan

    Sir, I wonder if portfolio rebalancing and diversification with an asset class (say equity) is another way to review a mutual fund portfolio.

    Lets say that I'm invested in 4 different equity funds (mix of large & mid cap). All of them are invested in multiple sectors, but some are more skewed to a certain sector (by design of the respective fund manager). My goal is to rebalance the portfolio in such a way that my exposure to any sector is limited to 15%.

    Here are the steps outlined for this process -

    1) Find out the top 10 sector weights for each fund in the portfolio
    2) Establish your monthly SIP amount
    3) Find out the SIP weights to be allocated for each fund that ensures that exposure to a specific sector is limited to 15%. This represents your ideal portfolio allocation
    4) Find out the weights of your current portfolio
    5) Rebalance accordingly either through switches, STPs or subsequent SIPs.

    Downsides? Fund manager may change his/her portfolio allocation next month
    Assumptions? Portfolio allocations don't change drastically

    Reply
    1. freefincal

      I think it is better to have funds in the folio with narrow investment mandate. This will ensure minimal overlap If there is overlap to begin with, then that must be taken care of first, beforing other evaluations. Rebalancing is for reducing volatility and not part of the review process.

      Reply
  7. austere

    Pattu-- v helpful post. Will see how to do XIRR for multiple lump sums over the years (not v good at maths.)
    One reason for multiple funds with the same mandate is "do not keep all your eggs in the same basket". In your opinion, how many fund houses shd one invest in?

    Reply
  8. austere

    Pattu-- v helpful post. Will see how to do XIRR for multiple lump sums over the years (not v good at maths.)
    One reason for multiple funds with the same mandate is "do not keep all your eggs in the same basket". In your opinion, how many fund houses shd one invest in?

    Reply
  9. SIVA PRASAD

    Dear Sir,
    How to review ELSS funds in below two scenarios? Required for 80C deductions.
    1. If amount invested is part of our portfolio assigned to a goal or
    2.Redeem the amount after 3 years and re-invest in the same or other ELSS fund and that goes on. Here the amount (total 3years investment) rotates in ELSS funds.Here we need not invest new money in to ELSS so that we are free to invest our money in our portfolio assigned to a goal.

    Please reply.

    Reply
    1. freefincal

      I do not like the idea of reinvesting in ELSS funds. I think it should be tagged to a goal. You can continue holding the fund as long as the fund is performing but you can stop investments when you no longer need the tax break.

      Reply
  10. SIVA PRASAD

    Dear Sir,
    How to review ELSS funds in below two scenarios? Required for 80C deductions.
    1. If amount invested is part of our portfolio assigned to a goal or
    2.Redeem the amount after 3 years and re-invest in the same or other ELSS fund and that goes on. Here the amount (total 3years investment) rotates in ELSS funds.Here we need not invest new money in to ELSS so that we are free to invest our money in our portfolio assigned to a goal.

    Please reply.

    Reply
    1. freefincal

      I do not like the idea of reinvesting in ELSS funds. I think it should be tagged to a goal. You can continue holding the fund as long as the fund is performing but you can stop investments when you no longer need the tax break.

      Reply
    1. freefincal

      My reference is the net XIRR of my equity folio. Wrt that if there are any poor performers and if I have held them loing enough, I get rid of them.

      Reply
    1. freefincal

      The net XIRR takes into every mf transaction ever made. This is available with portfolio trackers like perfios, Value Research, Mprofit etc.

      Reply
  11. Deepak

    Assuming that all funds in a portfolio have had enough time to "perform", given the current economic scenario, is it the right time to do portfolio review and take any action?

    Second, can the net XIRR be calculated by multiplying the individual XIRR by the portfolio weight to get the weighted return and then adding them

    Reply
    1. freefincal

      You cannot time portfolio reviews! I think it is best done at the same time each year.
      No net xirr cannot be calculated by doing a weighted sum.

      Reply
  12. Gagan Kaushal

    Thanks for the lucid article. I can now review my portfolio in a more organized way. But I still don't know how to switch! Over the years, I have few funds which I have stopped investing in as they were not performing well. Since I was trying to restructure my portfolio, I wanted to switch out of these funds. But alas, I can only switch inside an AMC not across. Having never redeemed any of my investments since more than last 10 years, I haven't yet taken the step as it is more of a psychological barrier. Is there any platform which allows such cross AMC switches? Does MFU allow it? I thought my online broker or CAMS may allow it but there is no such option apart from redemption and reinvestment.

    Reply
    1. freefincal

      Thank you. Simply hit redeem, and once the money is credited to the bank, buy more units in the funds you like. Simple as that. Will be done inside of 3 days!

      Reply
  13. Sriram R

    Dear Sir, Thanks for the response. Could you please clarify how this can be calculated with some transaction examples?It will be useful. I tried searching some examples on net but have not been able to find something useful.

    Reply

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