Many mutual fund investors consider the end of the year and new year as the best time to review their investment portfolio. If you are thinking of taking a close look at your mutual fund portfolio, we can help you. Investors often check the net asset value of their investments. One should forget to constantly check a fund’s Net Asset Value (NAV) or its past returns. These numbers alone don’t indicate performance. Instead, compare the scheme’s performance to its benchmark. Benchmarks provide a standard for comparison. If a scheme fails to beat its benchmark, one should identify this as short-term or long-term underperformance.

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For equity mutual funds, experts suggest that investors should evaluate how the fund has performed against its benchmark and peers over a medium to long term horizon. In case of debt mutual funds, high returns should not blind to the bigger picture. Instead one should check credit quality, duration, and how well the fund manager has managed the interest rate risks.

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“Investing is like tending a garden—it requires patience and periodic care. For equity-oriented funds, the review should always align with your investment objectives rather than just the numbers flashing on your app. Don’t let a year or so of underperformance send you into panic mode; instead, evaluate how the fund compares to its benchmark and peers over a medium to long-term horizon— say 3 to 5 years. Short-term underperformance can stem from market conditions, underperformance of a fund’s style, or sectoral trends, none of which necessarily spell doom. However, if the fund continues to lag behind its benchmark and peers consistently over several years with no signs of improvement, it might be time to switch lanes,” said Nilesh D Naik, Head of Investment Products, Share.Market.

“Debt-oriented funds, on the other hand, play by different rules. Here, high returns shouldn’t blind you to the bigger picture—consistency and risk-adjusted returns matter more. Look under the hood at factors like credit quality, duration, and how well the fund has managed interest rate risks,” he added.

Another expert recommends checking the performance of the fund at different levels such as fund house level, fund manager level or the particular style which fund manager follows. For the short term underperformance one should stay patient. However, if the long-term underperformance persists, one should reconsider or switch funds.

“Investments are made with a long term perspective. Therefore, short term under performance should not be much of a concern. Compare the fund’s performance against its benchmark and peer category over a period of at least 3-5 years. You can check the performance at different levels such as AMC level, FM level or the particular style which the FM is following. Analyze if the underperformance is due to temporary market conditions or structural issues within the fund or AMC. For short-term dips, staying patient is often the best approach. However, if long-term underperformance persists and the fund consistently lags its peers and benchmark, you should reconsider or switch funds,” recommends Chirag Muni, Executive Director, Anand Rathi Wealth Limited.

Many investors, especially DIY investors, often invest in NFOs without aligning them with their risk appetite and goals as the investment can be made at Rs 10. An expert mentions that many investors jump into New Fund Offers (NFOs) like kids drawn to shiny new toys. The Rs 10 NAV seems like a steal, but it’s the growth of the NAV, not its starting price, that determines wealth creation.

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Once the investors invest in new fund offers at the lowest amount of Rs 10 without aligning it with their investment horizon, risk appetite, and goals. The important thing to know is what to do with these investments if they are underperforming?

According to Chirag Muni, unlike IPOs, NFOs are launched to raise funds without offering any special perks, and their Rs. 10 per unit price is not tied to market demand. If your NFO is underperforming, keep an eye on it for about a year—track how the AMC, fund manager, and the theme are doing. If it is still not performing well or the theme is out of flavour, it is probably time to exit. That is why it is usually better to stick to funds with a proven track record instead of new ones.

The other expert believes that NFOs today are often niche offerings in sectoral, thematic, or index categories. For most of us, the smart move is to avoid unnecessary complications and stick to tried-and-tested diversified funds. So in case your investment in any NFO is underperforming, you now know whether to stay invested or to move on to tried and tested funds with a proven track record.

“NFOs today are often niche offerings in sectoral, thematic, or index categories. This trend arose after SEBI’s streamlining of mutual fund categories, which limited AMCs to introducing new products/funds. But these niche funds aren’t for everyone. They demand an in-depth understanding of specific sectors or themes and the ability to time entry and exit—hardly the hallmarks of most investors,” said Nilesh D Naik.

“For the majority, mutual funds’ strength lies in their diversification and professional management, where your job is to stay invested and let the experts work. Diversified equity funds like flexi-cap, large and mid-cap, or value/contra funds generally suffice for long-term goals. Savvy investors with market experience might evaluate NFOs’ role in their portfolio, especially from a tactical perspective. But for most of us, the smart move is to avoid unnecessary complications and stick to tried-and-tested diversified funds,” he added.

The Do-It-Yourself (DIY) investors know that mutual funds are the best bet to take care of their financial goals. They are also confident that they can do it all by themselves: do their own research, shortlist schemes, discuss their choices with friends or strangers in mutual fund forums, and proceed with their investments directly with the mutual funds.

If you are a DIY investor and want to review your portfolio and are eager to know what to do with the losses you have incurred, an expert recommends that you need a structured approach to review the portfolio. Diversification, proper asset allocation, and alignment with your financial goals are the cornerstones of an effective review process.

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“Compare the portfolio’s returns with broader benchmark indices and assess whether each fund is meeting its objective which you had intended it for when you started investing in it. Use metrics such as XIRR to gauge actual performance relative to your expectations,” recommends Nilesh D Naik.

He adds, “However, when it comes to losses, it’s important to differentiate between temporary dips due to market volatility and deeper issues like persistent underperformance or poor fund management. Remember, markets are cyclical, and short-term losses in a diversified portfolio are a normal part of investing. Instead of reacting impulsively, consider whether the loss presents an opportunity to rebalance or increase investments in high-conviction assets.”

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On the other hand, Chirag Muni recommends that if you are a DIY investor you should maintain a balance in the portfolio by keeping 80:20 equity to debt asset allocation for long term and 50:20:30 in large, mid, and small caps. Try to keep AMC exposure under 25% to avoid putting too much in one basket. Spot the gaps and rebalance as needed, and watch out for taxes or exit loads when making adjustments.

“DIY investors should make it a habit to review their portfolios at least once a year. Start by revisiting your strategy, ask yourself if your goals are still the same or if new ones have come up. Do not forget to factor in inflation because your money’s purchasing power changes over time. Check if your asset allocation matches your risk appetite and investment timeline. Sometimes loss booking is necessary to leverage on the opportunity cost and it should be used to set-off against gains,” he further recommends.

With the end of calendar year 2024 and three months still left for the end of FY25, Nilesh D Naik recommends that if you are under the old tax regime, this is an opportunity to ensure all investments under Section 80C are made, if not already done. ELSS funds, which offer tax benefits along with potential equity growth through diversification, can be an effective option. Additionally, if you’ve been contemplating exiting any underperforming funds (after evaluating them as mentioned earlier), now may be a good time since any short-term or long-term losses incurred can be set off against respective gains in your portfolio, optimizing your tax liabilities.

One should always make investment decisions based on risk appetite, investment horizon, and goals.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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