The recent uproar by bulls has attracted several investors into equity market through mutual fund route. Many of us have invested for the first time or have increased our investments; but the task is not complete just after buying a Mutual Fund. There are many things to be done once you have invested in a fund. Let us see what those are:
You may have bought the fund after thorough research or you might have chosen top performer of a category; no matter how you selected the fund, a periodic review of the fund performance is a must. A review once a year should suffice and while reviewing you should focus on following points:
- Fund vs Benchmark: Check if the fund is able to beat the benchmark and if not then keep the fund under your watch list since it is not performing.
- Fund vs Category: Compare your fund’s performance with that of other funds in the category (Large-cap, Balanced etc.) and see if the fund is an above average performer or not.
If your fund fails in one or both of these parameters then check if there is any change in the fund management or investment style. For example, sometimes when a fund manager changes, the fund undergoes a period of underperformance. However, if the underperformance continues for more than one review period then it is time to move on to a better fund.
Rebalancing your portfolio is as important as the annual maintenance service of your car or two- wheeler. This is to ensure that your investments are aligned in line with your financial goals. Rebalancing is updating the asset allocation of your portfolio periodically. Let us assume that you have invested in proportion of 80% Equity and 20% Debt for the goal of creating a corpus to buy a house after 20 years. After 5 years, the asset allocation would have changed to, say Equity 90% and Debt 10%. Then it would be prudent that you sell some portion of the equity fund and increase the investment in Debt fund to rebalance the portfolio to 80%-20% Equity Debt mixture.
Rebalancing should also be done when a goal is near completion. For the above mentioned goal, when 15 years have passed, you might want to move to safer funds and you may rebalance your portfolio to 60%-40% Equity Debt mixture. By the 17th or 18th year, you should move to 20%-80% Equity Debt mixture. It always makes sense to increase the debt portion of portfolio when the goal is near completion, this will give the much needed stability to it and any downturn in equity market will have minimal impact.
- Stay for Long Term
Once you have selected a fund and invested in it, stay with it for long term to take full advantage of power of compounding. You should redeem from a fund only if it fails to pass the review benchmarks or when your investment goal is completed. In the case when you have to redeem due to the poor performance of a fund, invest the proceedings in another fund. Also, do not redeem just because your fund has outperformed other funds and given very good returns, you may rebalance accordingly but redemption is not advisable until your goal approaches.
- Step Up
Each year as your income increases, your capacity to save and invest also increase. You should invest as much as possible each year. You may choose to increase the investment in your existing and well performing funds or you may invest in new funds. However, do keep the number of funds small so that your portfolio can be tracked and managed easily.
Once you have invested in a mutual fund, you have taken first step towards your wealth creation journey. However, to stay on the right path, it is important that you Review and Rebalance your funds periodically while stepping up the investment each year and stay invested for the long term.
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