Do not lose hope. A long term investor has time on her side. However you must also actively monitor the fund composition atleast once every 6 months and take corrective action.
Here are six tips for such a periodic review:
Tip #1. Investments should follow a Financial Plan
Many people invest “just like that”. They realize that there is a need to invest and simply invest in some instrument, hoping that the investments will help them sail through whenever the need for funds arises. However, it is better to take professional help and have a financial plan. When a financial plan is made, each of your goals is specifically planned for. It addresses the questions of why do we need the money, when do we need the money and if so much is required, how much of investments need to be done and in which instruments. The combination of investments takes into account various factors that are unique to you. The plan is made on the basis of certain assumptions. One of the assumptions is the return that is likely to be earned on the investments on an annual basis. If investments do not earn the assumed rate of return, then we will fall short of our targeted amount.
Tip #2. Do Your Regular Reading or Appoint an Advisor who does it
Mutual funds publish a monthly factsheet. It provides significant insights into how the fund is managed and what is the outlook of the fund manager/ fund house. This helps us to understand the thought process of the fund manager. It is advisable that we read the fund factsheet. This is like reading a newspaper. One must remember that reading of fund sheets is possible only if we have limited number of funds. If we have invested in every Mutual Fund that our advisorhas recommended, then reading the fact sheet becomes time-consuming.
Tip #3. Review Numbers Quarterly
A quarter is a good time to look at how the fund has performed, particularly against its benchmark and other funds in the same category. For example, if you have invested in ICICI Prudential Balanced Fund, its benchmark is Crisil Balanced Fund Index (Aggressive) and its peers against which it can be compared are HDFC Balanced Fund, Birla Sun Life Balanced ’95 Fund, SBI Magnum Balanced Fund, etc. It gives us a good insight into performance of the fund within its specific category
Tip #4. Take Action if required Annually
Having watched the funds for over 4 quarters, having read the fund manager’s thought process over 12 times in that year, you will get a fair indication of whether the fund is moving in the right direction and whether the returns earned are in line with our assumptions.
Also look at how it has performed vis a vis peers. If this fund has missed its mark by a distance, have other funds also under performed? Is there a change in the fund manager? Is there a change in the fund manager’s investment philosophy? Does your investment objective align with that of the fund? Although you would have considered the performance of the fund before investing, look at how the fund has performed over the last 5 years.
Going by all the factors, do you feel that you should continue with the fund, exit from it or keep it under an active watch for some more time? Personally, I will give a fund at least 1-3 years before I decide to exit from it. Of course, this is on the assumption that I have done my homework at the time of investment. It is strongly advised that this exercise is carried out with your financial planner.
Tip #5. Keep in mind Tax implications of Switching
Many times, we may exit a fund on emotional grounds. Even if you and your financial planner have decided to exit a fund, look at the tax implications of the same. This will depend on the period of holding and the type of fund. For example, let us say you have held an equity fund that has returned 9% in the past one year whereas other funds have returned, say 11% term and decide to exit from the fund. It has been 11 months since you invested in this fund. Exiting now would mean you will have to pay Short Term Capital Gains tax. If you hold on for one more month, the investment becomes long term and becomes completely exempt from tax. Similar concerns may apply for ELSS funds.
Tip #6. Be clear on where to redeploy
If at all you decide to exit a fund, you must have a plan in terms of how the money received on redemption will be deployed. It would be criminal to keep the money idle in a bank or to just spend the money buying the latest gadget. Thus, do not exit a fund without being clear as to where the money would be reinvested.
