Review your mutual funds in three simple steps!

Published: January 12, 2019 at 11:36 am

Last Updated on December 29, 2021 at 12:08 pm

Here are three simple steps to review the mutual funds we hold. When we select a fund, we look at past performance: last three years, five years etc. However, the moment we buy units of a particular mutual fund, all that matter is its performance from that point in time.

For example, suppose we start a SIP from Jan 1st 2019, there is no point look at its star rating in Dec 2019. Why? Because the star rating analysis is studying performance from Dec 2016 to Dec 2019 (3 years) and Dec. 2014 to Dec 2019 (5 years). We have been invested only from Jan to Dec 2019. Each window would produce a different result. A fund could be 5-star rated if we consider the last 5Y, 2-star rated in the last 3Y and if one could rate between Jan-Dec 2019, it could just about be anything. Which is why I had compared this to blind men touching an elephant

From Martha Adelaide Holton & Charles Madison Curry, Holton-Curry readers, Rand McNally & Co. (Chicago)

Unless we know when to wear the analyst cap and when to wear an investor cap, only confusion would prevail. There is one exception. If our investment is three of five years old, then one could look at an analysis for that time frame. However, even here, peer comparison is stressful.

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Comparing mutual funds before investing differs from comparing mutual funds after investing. Which is why for the sake of our sanity, it is important to establish ground rules.

Ground rules for reviewing mutual funds

1: Give mutual funds at least three years from the day we started investments. We will have the confidence to allow this time only if we select select the right category of mutual fund for our goal

2: Focus on the portfolio first, individual fund next. When we review portfolio growth (hopefully only once a year!) we first consider overall portfolio returns and its value. See My personal financial audit 2018 for an example.


3: Review the performance of our funds from date of first investment first and only then consider performance in the last few years (AKA trailing returns).

4 Choose benchmarks for individual funds and the overall portfolio to test performance.

5 Avoid comparing one fund with another. This is like a parent comparing children:

“Why can’t you be more like Ajay, beta?”. Duh! because I am different, dad?!

6 If we must, then let us compare our fund with its category, provided we have been invested for longer than the period of comparison. For example: period of investment is last 5Y and period of comparison with the category is the last 3Y

Three simple steps to review mutual funds

Three simple steps to review your mutual funds

Step 1: Compare your investments with a benchmark

  • Use a portfolio tracker like Value Research, Perfios or my excel tracker (recommended!)
  • Choose an appropriate benchmark for comparison.
    • For a large cap fund use NIfty 100. Since this is not available as an index fund, use 80% Nifty 50 index fund and 20% Nifty Next 50 index fund.So if we invest Rs. 2000 a month in two large caps, then setup a portfolio record with 80% of Rs. 2000 = 1600 a month in Nifty 50 index and rest in Nifty next 50 index fund.
    • 50% of NIfty 50 and 50% Nifty Next 50 will approximately emulate the performance of Nifty 100 Equal Weight Index and can be used for large and mid cap and/or multicap funds
    • Nifty Next 50 is an excellent benchmark for aggressive multicap funds or mid cap funds. You can also use ETFs but will have to enter transactions manually for SIPs at Value Research. You can automate this in my sheet but with ETF NAV  (not price) data.
    • Nifty next 50 or a good mid cap fund can be used to benchmark a small cap fund
  • The dates of investment in the benchmark funds should be the same as the dates in our funds.
  • So when you buy some mutual fund units, enter a transaction for the same amount in the chosen benchmark.
  • Accumulate this data for at least three years to judge funds. If after three years, the fund has not beat the chosen index, you will have to take a call. If the fund has performed well, then stay invested until the next review.
  • If the fund has not performed, proceed to step 3
Eighty percent Nifty 50 + 20 percent Nifty next 50
Eighty percent Nifty 50 + 20 percent Nifty next 50
50 percent Nifty 50 and 50 percent nifty next 50
50 percent Nifty 50 and 50 percent nifty next 50

Step 2: Track performance with a funds benchmark

  • In step 1, the benchmarks used were our own. We can repeat this exercise with the funds chosen benchmark.
  • Go to the value research fund page and to the performance tab and do the following

Review a fund using dynamic graphs

  • First the from date to date of 1st investment to check how the fund has performed wrt its benchmark during your invested period. If “okay” do not look again until next review.
  • If not “okay” then scroll the horizontal bar to check how the fund has fared over a similar period in the past. The set the scroll window a bit longer say 5Y and check how the fund has fared in the past.
  • If it has not done well over 3Y windows often but made up for it over 5Y, then you can take a chance and stay invested.
  • If the performance has been better in the past and has dipped recently, then it is probably time to say good bye.

Step 3: Compare risk and reward with category

  •  For this step, your investment must at least be 3Y old in that fund
  • Go to the Morningstar fund page

mutual fund review with morning star

  • Select 3Y or 5Y or 10Y.
  • Observe the fund position in the risk and reward scales vs category.
  • Look at the risk vs reward map (with yellow and blue dots) to check if the fund has beat the index and the category at lower risk or higher risk or has underperformed
  • Check the downside capture (how much of index losses has fund capture) should be less than 100
  • Check the upside capture (how much if index gains has fund captured). This is not important as shown here:  Strange, but true! How mutual funds beat the index!

These numbers should give you enough information and enough confidence to stay invested or get rid of your funds.

So what do you think?

Those were three simple steps to review the funds we hold. Do they make sense? Is something not clear? Would you like add to this? How do you review your holdings? Share below.

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