Here's a question sent by an informed and young Investor Shailesh by email. He asks, "how do I evaluate my MF portfolio? What are the best ways of choosing funds? What is a good tracking window? How do I interpret the best performing funds rankings data?"

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Read the question and the answer below

Question: I started investing in MFs about 1.5 years back. I use net banking for SIPs. Start of my journey I picked best performing funds using below criteria:

Allocation: Large cap/Multi cap: 60%, Mid cap/Theme: 40%, Total 8 funds
Choice: Check out Value Research Online listing of 5 star and 4 star funds with highest returns in 10, 5 yrs

Totally I invested in about 6 funds with using above principle. Along the way, I picked up 2 NFOs base on their investing principle (ex. Fidelity India Value Fund)…

Now my SIPs have come for a renewal. I tried analyzing who has performed and who has not. On a given date, I could see some performed better than others. I could not select a time frame to analyze them (since netbanking window doesn’t show these details). So technically I have compared them for approx periods and not exact periods. Some of these funds have bettered Sensex returns.

When I go back to the Value Research Online I see none of these figure in 50 Best Performing returns.

So the question is how do I evaluate my MF portfolio? What are the best ways of choosing funds? What is a good tracking window? How do I interpret the best performing funds rankings data?

My thoughts

1. Tracking: It’s important that when you need to manage something, you need to measure it first. The need for tracking comes out clearly in this issue being faced by Shailesh. From the question, I can assume that Shailesh has a rough idea of the returns as his Netbanking interface does not give out all the details.

I would suggest downloading an excellent MS Excel workbook on tracking Mutual Funds from Chandoo’s Excel Blog: Link. You can easily create a table of all the mutual fund holdings and monitor the latest NAVs (Net Asset Values) to see how your investments are doing.

2. Benchmarking: Each Mutual Fund scheme comes with a benchmark. You cannot compare a debt fund with the returns of the sensex/nifty. The benchmark data is available on the BSE/NSE sites and you can see if your mutual funds investments have overperformed or underperformed.

3. Chasing returns or sticking to your asset allocation?: There’s a thin line difference between the best return schemes and the schemes that is based on your asset allocation principles. Let me elaborate.

Normally, asset allocation means deciding portions for your debt and equity investments. The debt and equity portions perform independently of each other and this makes for the diversification of your investments. Now since the returns from debt and equity investments vary, the total investment returns depend on the asset allocation decision.

In Shailesh’s case his asset allocation decision is to divide his investments between large caps and mid caps. My feeling is that he wants to maximize his returns and does not believe in putting money in debt instruments. Assuming that he has a very aggressive risk appetite, it’s fine with me, though experts recommend some debt investments for diversification purpose.

It is possible that Shailesh choice of 60% Large cap/Multi cap and 40% Midcap schemes can give the best returns. But it is not guaranteed. The largecaps and midcaps performance vary and it can impact the overall returns.

4. The Road ahead: I personally believe that setting up your investment philosophy/asset allocation is more important than chasing the best returns. Because, the top 50 mutual fund schemes change all the time. Imagine that you change your schemes according to the top 5 schemes every quarter/half year. More often than not, you will need to chop and churn your investments every quarter/halfyear!

And chopping and churning has its costs. Your MF Advisor may be the only beneficiary in the chops and churns!

Now if I have to give some actionable suggestions to Shailesh, here it is:

a. Stick to the best performing 5 schemes instead of 8. So you take out 3 non performing schemes.

b. Decide on the investment themes that you believe in and review the 5 schemes and their investment theme. Also check on the Fund Manager’s profile (I personally consider this important).

c. Screen the top 50 MF schemes on the basis of expense ratio, AUM, investment themes and Fund Managers and list another 3-5 schemes for further scanning.

Before I conclude, I must say that this post can help you with a DIY review and that a professional Mutual Fund Portfolio review is also a good option for people who don’t have the time for a DIY review.

How do you review your mutual fund investments? Any suggestions that you can add? Any areas where you disagree?

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