Three Reasons Why Your Mutual Fund Portfolio May Be Underperforming
Rearview investment, over-diversification and not booking profit could be reasons for underperformance, according to this expert.
Several mutual fund portfolios have been underperforming, even as markets have been hitting highs. Wealth Monitor, an app that tracks and assesses portfolios, reported that out of the 60,000 crore portfolios analysed, 65% of the portfolios were underperforming.
It is a frustrating place to be in, when the hard-earned money that is invested into mutual funds fails to bring notable returns.
“The missed-out gains are massive and there are broadly three inherent reasons for the issue of underperformance,” Sanjeev Jethwani, co-founder of Dezerve Investment Management, said on NDTV Profit's The Mutual Fund Show.
Rearview Investment
Most people select funds based on their past performance, while the truth is that track record is not an indicator of future behaviour.
Looking only at the recent performance that the fund has demonstrated is not a balanced parameter, according to Jethwani.
Plotting the performance of a fund in the last three years does not guarantee the same returns or growth in the next three years.
Over-Diversification
“The average affluent investor in India has 22 mutual funds in their portfolio, which is one too many,” he said.
He attributed this problem to people following the investment choices of friends or family, without being mindful of their own investing capacity and goals.
This can also mean getting lost in the 'flavour of the season' and investing in highly volatile stocks simply because everyone else is doing it.
Not Booking Profit And Exiting
There are many changes that happen in the market cycle as the economic environment is evolving. Some of these changes can be opportunities to take money off the table, book profit and exit some funds, according to Jethwani.
He emphasised on the need for active oversight over systematic investment plans.
The Way Ahead
Jethwani recommended active reviewing, re-evaluating and refreshing of the portfolio.
The ideal portfolio consists of seven to eight funds in equity, he said. He recommends placing about 70% investments in equity mutual funds and 25-30% in fixed income.
“Rebalancing the portfolio is not by radical selling or buying, but by realigning and transitioning into a better position with time,” said Jethwani.
Outperforming the index isn’t the only goal in portfolio construction, but to also build a portfolio that has a decent downside tolerance, he said.
