Mutual fund
investments, along with fixed deposits and direct equity, are among the three
most common forms of investments. People with a little bit of risk appetite
usually prefer investing in mutual funds. Unlike with fixed deposits, where
most people put all their eggs in one basket (a huge chunk of money in order to
draw higher incomes from the interest), or equity stocks (which run a higher
risk and can be slightly unpredictable by nature) mutual funds can be termed as
one of the safest, low-risk forms of investments in which investors can park
their monies in several different funds of small amounts. But it is also
important to review mutual funds, both before investing and also, periodically
after. Let us find out how.
The
nature of mutual fund investments
Most people who invest
in mutual funds understand that in order to grow their wealth, they must put
away the monies for a long term. That is not to say that one should forget
about the investment and wake up only when the fund is due for maturity. It is
absolutely essential for investors to periodically review mutual funds and the
performance of the schemes. This is done by researching and reading up about
the historical returns of the scheme in question and comparing with the returns
of the category/benchmark to which that scheme belongs, done over the same
period of time. Reviewing the mutual fund is important as if you neglect to do so;
you run the risk of not achieving your strategic, time-bound, planned goals. As
such, you should review your mutual funds at an interval of every six to nine
months in general.
4
things you should do to review your mutual funds
Study
the performance of the mutual fund scheme: Over different
periods of time e.g. six months, 1 – 3 years or even 5 years and above, the
historical absolute returns of a particular mutual fund scheme can give you a
decent idea of the nature and performance of the scheme in question. Instead of
just comparing the point-to-point returns, investors must pay attention to the
returns earned during the various, market cycles in order to review mutual
funds in detail. If you study the pattern and find out that the absolute
returns are constantly below par or do not meet expectations, then that could
definitely put the investors’ goals at risk and could even mean that the goals
wouldn’t be met at all.
Compare
the performance of the scheme: After studying the scheme’s performance,
investors must also compare it along with the benchmark and category in which
the scheme belongs. When investors study the returns vis-à-vis its benchmark,
they can understand if the fund has been able to generate enough premium that
justifies the cost of the scheme versus simply tracking the benchmark via an exchange
traded fund. This comparison with category returns can help investors
understand if the outperformance (or underperformance thereof) can be
attributed to an entire category, to just the scheme or a little bit of both
the things. In case the scheme has been underperforming consistently, then it
is in the best interest of the investor to bow out of it and switch to better
performing schemes in the same category.
Access
the risk: To review mutual funds, investors must also access
what risks were undertaken in order to earn those returns. Risks can be
accessed by using several measures such as Standard Deviation, Treynor Ratios,
Sharpe etc. Simple Deviation is the simplest of all the above mentioned
measures of accessing risks. It is comprehensive and gives investors a decent
idea of what risks are involved in earning expected returns. Investors can then
compare the risks associated with the scheme along with the category average
and check if it matches their expectations as well as their own risk profile.
Changes
in asset allocation: Investors must also consider any asset
allocation changes at their level, which may have occurred after the original
investment was done. This is another way to review mutual funds. Since all
assets may not necessarily decline or grow at the same rate, the chances of
this happening are high. Investors must ensure that their current asset
allocations meet their originally intended allocation. Investors, who’ve put
their money in sectoral, thematic or specific segments of the market, should be
extra careful, as they are also exposed to unsystematic risks. They must access
the macro events related to the sector, such as regulatory changes in the
economic conditions which can help them estimate projections of the theme or
sector up to a certain degree.
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