INVESTMENT: Reviewing fund performance tricky

Reviewing performance of funds in the portfolio is a significant activity as it helps you determine whether your portfolio is doing the job for you or not. However, many investors find it tricky to handle aspects relating to measuring the performance of funds in their portfolio.

As a result, they end up either tweaking their portfolios in a hurry or remaining invested for years in the hope of an improved performance from funds performing poorly. Then, there are those who love to look at Net Asset Values (NAVs) of funds everyday and, hence, find it extremely stressful to handle volatility in the market.

While reviewing the performance is important for long-term health of your portfolio, the key is to put performance in perspective and understand the reasons for non-performance. As an investor, you must know how to differentiate a fund manager's poor performance from the stock market's poor performance. Remember, in a falling market, a fund manager can't be expected to give positive short-term returns. In fact, if the fall in NAV of the fund is lesser than the peer group, it amounts to out-performance.

Remember, reviewing fund performance in a haphazard manner can compel you to make some investment decisions that could have a significant negative impact on your financial future. Therefore, you must follow the right process to do so.

Here are some guidelines to remember while reviewing your portfolio's performance:

Analyse how your portfolio is performing from the point-of-view of your personal goals. Are you comfortable with the level of volatility that may have occurred keeping in view your short, medium and and long-term goals? If your answer is in the negative, realign the asset allocation of your portfolio.

While stock market tends to be volatile from time to time, different segments of the market, that is, large cap, mid cap and small cap also perform differently at different times. As the tide shifts in favour of a particular segment, the performance of funds focusing on that segment improves dramatically. Therefore, making changes in the portfolio every now and then based on short-term performance of a particular segment can backfire in the long term. The key is to focus on your allocation as that helps in earning returns commensurate to your risk profile.

Another important aspect is to compare the performance with scheme's benchmarks as well as with that of other schemes in the same category, over different time periods. If a fund is not keeping pace with its peer group, exit from it and move the money to another fund that deserves a look from a long-term point-of-view. By doing so you can enhance your chances of improving returns over time. Remember, the performance of a scheme is best measured in terms of total returns.

You should hold a fund long enough to evaluate its performance, that is, a minimum of one year or so. Avoid making the mistake of either holding onto funds for too long or exiting in a hurry. Remember, a wrong decision can either expose you to the risk of missing out on good rallies or getting out too early, thus missing out on potential gains.

Do a thorough analysis before taking a decision to sell. Many investors sell funds without giving them time to show what they can do. That's why proper selection of funds becomes important. If you select well at the start, you can avoid these situations occurring frequently.

The writer is CEO, Wiseinvest Advisors