It is well known that investing in the market will help you in earning extra income. However, just allocating a portion of your income to mutual funds is not enough. Investing in a mutual fund scheme is only half of the work completed. Once your income has been invested, it is also equally important to track the performance of your mutual fund portfolio from time to time. Before going ahead with mutual funds investment, it is of utmost importance to take financial advice from a professional for due diligence. But once funds are allocated into mutual funds schemes, people generally forget about them until a need for redemption arises. But that’s the thing, you need to track the performance of your mutual fund portfolio even if there wasn’t any need.
Why is it important to track the performance of a mutual fund portfolio?
In the registration form for a mutual fund, there is a disclaimer that should be read. The said disclaimer reads, ‘past performance does not indicate a fund’s future performance.’ To put it simply, it means that, it will be extremely short-sighted on the investor’s part to expect the same past good performance and thereby, guaranteed investment returns. As a result, to evaluate and select the right mutual fund scheme, you need to look beyond the returns of the previous years. It is important for you to monitor your mutual fund portfolio so that you can make the best decisions that may result in higher returns.
You need to understand that the capital market regularly experiences fluctuations because the general financial conditions are known to change. Such a change generally disturbs a portfolio’s asset allocation. For instance, in the case of a market rally, the initial allocation of 50:50 in equity & debt instruments may be changed to 60:40. Doing this can improve the fund’s risk profile beyond the investor’s needs.
Tracking a portfolio performance also helps you to compare your portfolio’s performance with other funds. The assessment of your mutual fund portfolio may also be caused by a change in the fund manager or the basic characteristics of your fund. Thus, it is necessary to review and re-balance the portfolio risk profile.
How to track the performance of a portfolio?
Listed below are the ways you could the performance of your mutual fund portfolio:
- Fund fact sheet:
In simple words, a fund fact sheet is regarded as a document that contains details of each of the mutual fund schemes managed by an AMC or mutual fund house. The said sheet is put out by the fund house or the AMC every month and it is in an easy-to-read format. The sheet contains the following information:
- Scheme’s performance:
The scheme’s performance is read in the terms of beta and sharpe ratio, standard deviation, and CAGR, i.e., compound annual growth rate.
- The information about the deployment of your money in securities.
- Details such as the size of investment of each scheme run by the mutual fund scheme.
A fact sheet can be easily found on the website of AMC, and it functions as an optimal way to monitor the performance of your portfolio.
- Expense ratio:
The expense ratio simply put is the charge levied on you to manage your mutual fund portfolio. The expense ratio serves as a representative of a fund’s value-for-money aspect. The expense ratio consists of fund management fees and the other fund management associated expenses. The expense ratio is known for having an impact on your ultimate in-hand returns.
Carrying out a comparison of the performance of the fund against a benchmark is always recommended. The benchmark is known for functioning as a performance standard for mutual fund schemes. In case your mutual fund portfolio repeatedly outperforms the benchmark, it means that the fund is performing well. It is also possible for you to compare the average return of your scheme with your peer fund schemes during a specific time frame.
- Portfolio holdings:
A look at significant modifications in your portfolio holdings may reveal overlaps. The fund needs to maintain stocks that come with a reduced proportion of P/E, i.e., price to earnings-per-share in comparison to the price to book (P/B) value. Simultaneously, you also need to ensure that the fund invests according to the investor’s financial goal. A poor indicator is a fund with a high portfolio turnover ratio in comparison to reduced yields.
- Sharpe Ratio:
The sharpe ratio serves as a demonstration of how much extra revenue you get to enjoy for your additional risks. It is important to remember a thumb rule. The said rule is – the higher the risks, the higher the compensation. Moreover, you also can enjoy a prize, i.e., additional returns for the added volatility. This ratio informs you exactly how much this reward should be.
With the help of the five ways mentioned above, you could keep track of your mutual fund portfolio’s performance at regular intervals. But it is also important to remember that you should give at least 6 months to any mutual fund plans.