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Having made an investment in a mutual fund, you should monitor it to see whether its management and performance is in line with stated objectives and also whether its performance exceeds or lags your expectations. Unlike individual stocks and bonds, mutual fund reviews are required less frequently, once in a quarter should be sufficient.
A review of the fund's performance should be carried out with the objective of holding or selling your investment in the mutual fund. You might need to sell your investment in a mutual fund if any of the events below apply.
Investment approach:
For example, as you grow older you might adopt a more conservative investment approach, pruning some of your riskier (equity-oriented) funds.
Changes strategy:
A fund that alters its investment objective or approach might no longer fit your strategy.
Fund performance:
If a fund regularly trails other funds that invest in similar securities, consider replacing it. The poor performance is more often than not a reflection on the relative expertise of the asset management company.
By now you would have realized that investing in mutual funds is not just a decision but is more a process. Using the checklist below should help you to extract the most from your mutual fund investment process. We assume that you will be investing largely through mutual funds to meet your targeted asset allocation plan.
Index funds:
Index funds offer you probably the ideal hedge against varying performance across sectors and across fund managers over longer-periods of time.
Sector funds:
Investing in specific sector funds is recommended for aggressive investors. However, if you are not in close touch with the developments in the sector or do not review your portfolio regularly, we would not recommend investing in sector funds.
Sales load:
Management fees, annual expenses of the fund and sales loads can take away a significant portion of your returns. As a general rule, 1% towards management fees and 0.6% towards annual expenses should be acceptable. Try and avoid funds that have a sales load, unless of course they have a consistent track record of being a top-performer.
Fund managers:
Since you will be giving past track record a consideration, you are inadvertently relying on the continuity of the fund manager. Stay away from mutual funds whose fund managers change often.
Established track record:
As far as possible avoid investing in funds with an asset base of less than Rs 25 crores. Which means that we are recommending you invest in funds only after they have established a track record. And unless it is a really exciting new (theme) fund that fits into your asset allocation plan, try and avoid new funds.
Customer Service:
Check out the customer service delivery mechanism of the mutual fund you choose. Can you get in touch with them easily? How long do they take to disburse payments? How often do they send you portfolio updates? And investor newsletters? These questions are important to address because shortcomings on any of these factors could affect your overall returns.
Spread risks:
Do not hold just one fund in each asset category. Its good to diversify your risk between different funds, but do not overdo it.
Review performance:
Try to review your mutual fund holdings atleast once a quarter. If you follow the same principles to review as you did to identify the mutual funds you invested in, you will be able to take 'sell decisions' very easily.
Invest regularly:
Try to make mutual fund investing an integral part of your savings and wealth-building plan. The monthly investment plan option offered by some mutual funds is a strongly recommended approach for you to execute this process However, don't let the availability of this option override your fund selection criteria.
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