Why it is important to review your mutual fund portfolio with a MFD
Before we delve into the subject. Think about going on a road trip without checking your car’s engine, fuel level, tire pressure, or GPS route.
Traveling in such a scenario, can put you in trouble, perhaps taking the wrong route, running out of fuel, or experiencing an engine breakdown.
Well, the same analogy applies to your mutual fund portfolio. If you don’t check it on a regular basis, you might miss out on the opportunity to invest when markets are down, take unnecessary risks, or have investments that no longer match your financial needs. That’s why reviewing your investments with a Mutual Fund Distributor (MFD) is crucial.
Why is a mutual fund portfolio review important?
Regularly reviewing your mutual fund portfolio is a crucial habit for any investor. It helps you stay on track with your financial journey and make informed decisions. Let's understand a few key points on why a mutual fund portfolio review is important:
1. Aligning investment with your financial needs
Your financial needs change over time, and so should your investments. A well-structured portfolio review makes sure that your asset allocation reflects your current priorities. Reviewing is important because investments are not "set and forget." A strategic portfolio review is a must to ensure that your investments remain aligned with your financial objectives, risk tolerance, and market trends. Just as you visit a doctor for a health check-up, your portfolio, too, needs periodic reviews to stay financially fit. Underperforming funds, rebalance asset allocation, and optimize returns while staying ahead of inflation.
Key aspects to consider:
- New Financial Commitments: If you take on a mortgage, start a business, or have a child’s education to plan for, your liquidity needs change.
- Retirement Planning Adjustments: A static portfolio could mean an inadequate corpus due to inflation or lower-than-expected returns.
2. Identifying underperforming before it is too late
A common mistake investors make is assuming that the past performance of a fund guarantees future success. Regular reviews with an MFD can help in making informed decisions about whether to hold, switch, or exit such funds. However, historical winners can become laggards due to multiple factors:
Key aspects to consider:
- Compare Fund Returns Against Benchmarks & Peers: If your fund consistently lags its benchmark over multiple quarters, it's a red flag.
- Expense Ratio Analysis: Higher expense ratios can eat into your returns over time, reducing overall profitability.
- Fund Manager & Strategy Changes: If a fund has deviated significantly from its original approach, it may no longer align with your objectives.
3. Rebalance your Portfolio
Your portfolio should maintain the asset allocation you originally decided upon when you started investing. However, market fluctuations can cause deviations over time. If left unchecked, this drift can expose you to higher risks or lower returns than expected.
Key aspects to consider:
- Adapting to Changing Market Conditions: Economic factors, inflation, and interest rate changes can impact different asset classes differently. Rebalancing ensures your portfolio remains well-positioned.
- Reassessing Investment Horizon: As you get closer to your financial needs (e.g., retirement, home purchase), your portfolio should shift to a more stable allocation to protect accumulated wealth.
- Maintaining Liquidity for Financial Needs: Rebalancing ensures you have sufficient liquid assets available for near-term requirements, preventing the need for emergency withdrawals from long-term investments.
4. Reducing tax burdens
Tax efficiency is an essential aspect of portfolio management. Unplanned redemptions, incorrect asset allocation, or lack of tax-optimized investment strategies can lead to unnecessary tax outflows. A structured portfolio review identifies ways to legally minimize tax liabilities while maximizing post-tax returns.
Key Factors to Consider:
- Tax-Optimized Withdrawal Strategies: Systematic Withdrawal Plans (SWP) help in reducing capital gains taxes.
- Utilization of Tax-Saving Instruments: Investing in tax-efficient funds such as ELSS can provide benefits under Section 80C.
- Long-Term vs. Short-Term Gains: Holding equity investments for more than a year ensures lower taxation under the long-term capital gains tax structure.
5. Managing liquidity for emergencies and future financial needs
Liquidity is often overlooked in long-term investing. While wealth building is essential, ensuring you have access to funds in case of emergencies or near-term financial needs is equally important. A review helps in maintaining a balance between long-term investments and short-term liquidity needs.
Key factors to consider:
- Emergency Fund Allocation: Ensuring a portion of your portfolio is in liquid assets for unforeseen expenses.
- Short-Term Needs Planning: Aligning investments with upcoming financial needs, such as home purchases or education expenses.
- Exit Load & Lock-In Period: Understanding fund-specific restrictions before redemption to avoid penalties.
Why should a mutual fund distributor review your mutual fund portfolio instead of you doing it yourself?
There are many investors attempting to manage their portfolios independently, relying on surface-level research or past performance, this approach often leads to costly mistakes such as holding onto underperforming funds, missing better opportunities, or failing to rebalance at the right time. Without professional guidance, even the best investment strategies can fall short.
Another important reason to consider the guidance of MFD is underinvestment. Many investors set ambitious financial targets but fail to invest adequately to achieve them. For instance, if your financial needs require investing ₹25,000 monthly, but you’re currently investing only ₹10,000, your corpus at the end of the tenure may be significantly lower than expected.
Why does this happen?
- Lack of awareness about required investment amounts
- Overestimating future returns and underestimating inflation
- Hesitation due to market volatility or short-term expenses
This highlights a crucial reality—the cost of an uninformed decision can be far greater than the cost of professional advice. Investing without expert guidance and skipping regular portfolio reviews is like navigating an unknown road without a map—risky, uncertain, and full of potential detours.
A well-structured investment strategy, coupled with periodic portfolio reviews by an MFD, isn’t just a best practice—it’s the defining factor between wealth creation and financial stagnation.
Mutual fund investments are subject to market risk, read all scheme related documents carefully.