Why is it Important to Regularly Review a Mutual Fund Portfolio?

One of the reasons mutual funds are so popular is that they offer a mostly hands-off approach to investing. Professional fund managers handle the day-to-day decisions, so as an investor, you can sit back while the experts manage your money. Even so, it is important to review your mutual fund portfolio regularly. Why, you ask? Let’s find out.

5 reasons to review your mutual fund portfolio  

1. To check if the fund is performing well and delivering optimal returns

A regular mutual fund portfolio review allows you to assess whether the fund is performing well and delivering optimal returns as per your expectations. If you have multiple funds, it is essential to understand how each one is performing. Regular portfolio reviews help you stay on track. They allow you to determine your top performers and spot underperformers.

This information can be crucial for future financial decisions. For example, if you are planning to top up your investments, a review will show you which funds are worth increasing your investment in and which ones you might want to avoid.

2. To ensure the portfolio aligns with your financial needs and risk appetite

Investing in mutual funds, especially equity, can be a long-term endeavour, and over time, your financial needs and risk appetite can likely change. Regular portfolio reviews ensure that your mutual funds remain aligned with your needs and risk tolerance.

For instance, if your risk appetite has decreased and you hold too many equity funds, you may consider shifting your money to relatively more stable options like debt funds. On the other hand, if you prefer to stay in equities, you could consider moving from small-cap stocks to large-cap or blue chip funds for a more stable approach.

Regular reviews can help you adjust your strategy over time and keep it aligned with your preferences.

3. To ensure your mutual fund portfolio is tax optimised

Tax implications are a big part of your mutual fund investments. They can either reduce your returns if you are taxed too much or boost them if you are able to save on taxes. Conducting a regular mutual fund portfolio analysis ensures that your investments are tax-optimised according to the latest tax rules.

If you do not have any tax-saving mutual funds in your portfolio and are paying high taxes, you might consider adding some Equity Linked Saving Schemes (ELSS) funds. These funds offer tax benefits under Section 80C of the Income Tax Act, 1961.

Similarly, if you plan to use tax-loss harvesting, you could sell some underperforming mutual funds to offset your gains for the year. If you are redeeming your investments, a review can help you decide which funds to sell based on their holding period and the capital gains they generate.

4. To rebalance your mutual fund portfolio

Rebalancing your mutual fund portfolio is essential and should be done regularly to ensure it remains aligned with your financial goals. Portfolio rebalancing allows you to take advantage of market movements. It helps you manage risk effectively. It also allows you to ensure your portfolio remains diversified and aligned with your goals.

5. To ensure liquidity for your immediate financial requirements

Reviewing your mutual fund portfolio is crucial if you need access to funds for immediate financial requirements. Assessing the liquidity of your investments helps you identify which funds can be easily liquidated. You can make informed decisions about which funds to sell now to meet your needs and which ones to hold onto for potential future gains.

How to check a mutual fund portfolio?

Here are the steps to check or review your mutual fund portfolio:

• Take a look at the returns: Review the returns of your mutual fund investments over the last 1 year, 3 years, and 10 years. This can help you gauge the performance of your investments over time.
• Compare to a benchmark or the market average: Compare the returns of your funds with a benchmark index (in case of index funds) or the market average to understand if your investments are performing as expected or if they need any changes.
• Review management structure and fees: Check if there have been any changes in the fund's management or fees. Changes in the management team or fee structure can impact the fund's performance and overall value.
• Check portfolio composition: Go through the fund’s portfolio composition and take a look at the sectors it invests in, to see how well diversified your investments are and if they align with your financial goals.
• Consult with a financial advisor: If you are doubtful about the performance or strategy of your investments, consult with a financial advisor to discuss your next steps.

Conclusion

A mutual fund portfolio review can be helpful in multiple ways, so do not put it off for too long. It may be advised to conduct a review at least once a year to assess where you stand and plan for the future accordingly. Additionally, seeking help from a financial advisor can help you avoid mistakes and ensure that your portfolio is well-aligned with your goals.

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