Managing your mutual fund portfolio

Investing in mutual funds is only the first step toward building wealth. To maximise returns and mitigate risks, investors need to actively manage their mutual fund portfolios. This involves knowing when to buy, hold, or exit funds, understanding portfolio rebalancing, and avoiding common mistakes that could erode potential gains.

When to buy, hold, or exit mutual funds

When to buy

Investors should consider buying mutual funds when:

• Market conditions are favourable: While timing the market perfectly is difficult, buying during market corrections or downturns can provide opportunities to purchase units at lower NAVs (Net Asset Values).
• Aligning with financial goals: Investments should be made with specific financial goals in mind, such as retirement, children’s education, or buying a home.
• Investing for the long term: If the investment horizon is long (5-10 years), buying equity mutual funds can provide better compounding benefits.
• Portfolio diversification is needed: If an investor's portfolio is heavily skewed towards one asset class, investing in funds from different categories (equity, debt, or hybrid) can provide balance.

When to hold

Holding onto mutual funds is important in scenarios like:

• Long-term financial planning: If the fund is consistently performing well and aligns with your financial goals, it is wise to hold onto it for compounding benefits.
• Temporary market downturns: Market fluctuations are normal, and short-term volatility should not be a reason to exit unless fundamentals change.
• Rebalancing not required: If the fund continues to meet your asset allocation strategy, holding onto it is advisable.

When to exit

Investors should consider exiting mutual funds when:

• Consistently poor performance: If a mutual fund consistently underperforms its benchmark and peers over a prolonged period, it may be time to exit.
• Financial goals are achieved: If the investment has met or exceeded the target amount required for a financial goal, booking profits is a smart move.
• Change in fund management strategy: If the fund undergoes significant changes in investment strategy or fund manager, investors should reassess their holdings.
• Better opportunities arise: If another fund with a similar risk-return profile offers better prospects, switching can be considered.

Portfolio rebalancing: how and why it’s important

Portfolio rebalancing ensures that investments remain aligned with financial goals, risk tolerance, and market conditions.

Why rebalancing is important

• Maintains desired asset allocation: Market fluctuations can cause asset allocation to drift from the intended proportions. Rebalancing helps restore the original allocation.
• Reduces risk: Rebalancing allows investors to reduce exposure to high-risk assets and maintain stability in their portfolios.
• Enhances returns: By selling overvalued assets and reinvesting in undervalued ones, investors can optimise returns.
• Prepares for financial goals: As investors approach their goals, they may need to shift from equity-heavy portfolios to more stable debt or hybrid funds.

How to rebalance

1. Assess the current portfolio: Review the allocation across equity, debt, and hybrid funds.
2. Compare with target allocation: Determine if any asset class is overrepresented or underrepresented.
3. Sell over-weighted funds: If equity funds have grown significantly and now represent too large a share, partial profits can be booked.
4. Invest in under-weighted funds: Deploy the proceeds into asset classes that have declined, maintaining balance.
5. Review annually or semi-annually: Regular checks ensure that the portfolio remains aligned with financial objectives.

Common mistakes to avoid while managing mutual funds

1. Chasing past performance

Investors often buy mutual funds based on past high returns, expecting the trend to continue. Instead, focus on consistency and future potential.

2. Ignoring expense ratios and fees

Higher expense ratios eat into returns. Comparing funds with similar performance but lower expenses can help maximise profits.

3. Over-diversification

While diversification reduces risk, excessive diversification dilutes returns. Holding too many mutual funds can be counterproductive.

4. Timing the market

Trying to buy at the lowest point and sell at the highest is nearly impossible. Sticking to a disciplined investment strategy like SIPs (Systematic Investment Plans) is more effective.

5. Not reviewing periodically

Many investors adopt a 'set and forget' approach. Regular reviews help adjust investments to changing financial goals and market conditions.

6. Reacting to short-term market fluctuations

Short-term market movements should not dictate investment decisions. Staying invested for the long term provides better compounding benefits.

7. Ignoring taxation

Understanding tax implications, such as LTCG (Long-Term Capital Gains) tax on equity mutual funds and indexation benefits on debt funds, helps in better financial planning.

8. Withdrawing investments too early

Exiting investments prematurely due to impatience or fear can result in lost potential gains. Allow investments time to grow.

Conclusion

Effectively managing a mutual fund portfolio requires discipline, periodic review, and strategic decision-making. By knowing when to buy, hold, or exit funds, practising portfolio rebalancing, and avoiding common pitfalls, investors can optimise their mutual fund investments for long-term financial success. Regular monitoring, aligning investments with goals, and staying updated on market trends will ensure a robust and rewarding investment journey.