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How to do an annual review of your mutual fund portfolio in five easy steps

An annual portfolio review allows you to take a close look at what’s working in your portfolio and what’s not. But any big life changes like marriage, birth of a child, death in the family, and inheritance are also occasions for you to revisit your investments.

December 03, 2022 / 06:37 PM IST

Investments in mutual funds need time-bound monitoring to ensure that they help you achieve your financial goals. Here is what you should know about how to review your portfolio of mutual fund schemes.

When to review?

Though there is no rule of thumb on how frequently you should be reviewing your portfolio, most experts prescribe reviewing your portfolio at least once a year. The core rationale for the review is to assess if the existing investments are delivering in line with your expectations, and if not, then taking corrective actions.

In addition to such time-bound reviews, consider reviewing your portfolio in case of some life events or external shocks. Life events, such as big pay hike, job loss, getting married, child birth, death of a family member and separation lead to change in financial goals, and hence warrant a review. External events such as the Covid-19 pandemic, wars and recession change financial markets and the world of business, which too call for a review of your portfolio.

Whatever be the frequency you decide on, do stick to your review schedule.

What to check?

According to CRISIL, in the last one year, short-term debt funds returned 5.90 percent, large-cap funds lost 1.80 percent, and multi-cap funds gave 8.30 percent. Should you, therefore, now sell all your large-cap holdings and distribute the sale proceeds between short-term debt funds and multi-cap funds?

Certainly not. Most first-time investors try to identify ‘winners’ and ‘losers’ by looking at past returns. Financial planners, instead, ask to look at the portfolio as a whole. “The investor should first check if his portfolio is broadly in line with the general trend of the financial markets, after factoring in the asset allocation he started out with,” says Rupesh Nagda, Founder and Managing Director, Family First Capital.

Look at your asset allocation instead. If, due to, say, outperformance of the equity funds, the equity portion in your portfolio goes up sharply, it’s best to book some profits and buy the so-called underperforming asset. Remember the age-old wisdom: Buy-Low-Sell-High. That’s one of the most proven ways to make money from your investments.

Take another example. In rising markets, gold investments (gold MFs or exchange-traded funds (ETFs)) do poorly. So, in such times, should you sell gold and buy more of equity?

No. Do the opposite. Cut equity, book profits, but do not sell gold.

“While assessing your mutual fund schemes, do check how they have performed against their benchmarks, and against their peers,” says Deepak Chhabria, Founder and Managing Director of Axiom Financial Services. “There will be periods of underperformance, and investors should not take corrective steps in a hurry.”


If your portfolio’s asset allocation has changed, then you need to rebalance it. Sell the asset class that has gone up and invest the proceeds in one that is under-represented. Some investors also add more to the asset class that is under-represented to rebalance their portfolio.

“The deviations from target allocations here must be significant to warrant a change. A deviation of more than 15 percent is a good starting point to consider. Also, all rebalancing and reconstitution exercises must be undertaken while taking tax and exit load implications into account in a way that the benefit outweighs the cost,” says Nirav Karkera, Head-Research, Fisdom.

While rebalancing  also correct the allocations to sub-segments. For example, in your equity portfolio you may have 70:20:10 allocation to large-, mid- and small-cap funds respectively. You may see the allocation to small- and mid-cap schemes falling, if the markets turn volatile. You may want to correct it if the deviation is sizeable.

Corrective actions

While rebalancing, investors can also take corrective actions, such as weeding out the underperformers and introducing new products that exhibit low correlation with your existing investments, which, in turn, can help improve risk-adjusted returns.

Also read | Check out Moneycontrol’s curated list of 30 investment-worthy mutual fund schemes

Underperformance need to be seen in comparison to peers and the benchmark. Investors must also give due consideration to style diversification. There are times when certain styles of investing may not work.

For example, value investing did not click in 2011-2019. Portfolios with focus on quality did not pay off in 2021-2022. Different investment strategies work in different times. Hence, investors need to maintain strategy or style diversification in their portfolios.  Loading on to one style of investing can hurt at the portfolio level if it goes out of favour.  If your equity mutual fund portfolio has done poorly over the last two years compared to the broad equity markets, most probably you have very low allocation to value-focused investment strategy and / or small- and mid-cap funds.

“In case of underperformance, an investor need not sell the scheme immediately. He may choose to hold on to existing units and stop adding more till the time there is enough information on hand to take a decision to exit,” says Chhabria.

Schemes underperform when a style goes out of favour, fund manager changes, investment process changes, investment premise goes wrong or is taking longer than expected to play out, and the fund manager does not walk the talk. When the underperformance is not temporary, it is better to exit.

“If a scheme underperforms and falls in the fourth quartile and stays there for three consecutive quarters, then I prefer to exit,” says Nagda.

Get rid of leftovers

Often, you invest in equity schemes through a systematic transfer plan (STP), where you invest a lumpsum in a liquid fund and then transfer small and equal amounts to equity funds. Sometimes, after your STP is complete and you’re done transferring all your initial corpus into the equity fund, some residual units are left in your liquid fund. This is because your liquid fund also grows in the meantime.

You can transfer these residual units to your equity fund as well and close your liquid fund account.

Look out for any legacy investments in your portfolio, like some age-old investments that you would have forgotten. They may not move the needle for you, but they make your portfolio statement look bloated. And money is money, after all.

Also, check the hygiene factors, such as nominations and updated contact details for your portfolio constituents. As per new norms, these are mandatory.

Change the nominations and contact details if required; these help in tracking and smooth transmission of assets.

More work for DIY investors

Chhabria says that most investors “end up blindly chasing returns, and hence, we come across studies where investor returns are far lower than the scheme returns”.

Do It Yourself (DIY) investors have a bigger task of overcoming their biases as they may not have a sounding board in the form of an advisor.

Vijai Mantri, Chief Mentor and Co-Founder, Jeevantika, asks investors to look inward. “Instead of asking the distributors the names of future winners in mutual fund schemes, investors should ask if they are investing enough for their financial goals, and if there is a need to change the attitude towards investing.”
Nikhil Walavalkar
first published: Nov 23, 2022 08:55 am