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Rejig your portfolio to ensure optimum returns

August 18, 2014 12:19 IST

This is a good time to revisit your portfolio and rejig it, says Arvind Rao, chartered accountant and founder of Arvind Rao & Associates.

This is because Union Budget 2014-15 has given income tax-related directives for the year and equity markets have also gained quite a bit.

Restructuring portfolios, experts say, isn't just rebalancing the asset allocation, but also doing away with unwanted investment schemes.

Asset allocation can be rebalanced by moving money from a non-performing asset class to a performing one or by booking profit on a performing asset class.

Some, such as entrepreneur Anjan Das, do not understand how to do away with non-performing mutual fund schemes from portfolios.

The 35-year-old fails to understand how to decide whether a particular scheme should be kept in one's portfolio or not.

Anutosh Bose, chief operating officer at LIC Nomura Mutual Fund, says, "If a particular mutual fund scheme is growing or performing in line with your goal, leave it alone.

Consider a case in which you want to buy a car in five years and you will need Rs 5,00,000 for that.

If you've decided to invest a certain amount, expecting the fund to earn say 12 per cent annually to achieve the targeted corpus and the fund is earning that much, the fund is worth sticking around with." However, this doesn't mean you should constantly keep checking the returns.

For this, a difference of about a per cent in returns and your expectation should not be taken seriously.

Equity and related instruments can see performance variations in a short term; judge the performance on an annual basis. You should start shifting the money accumulated to a debt fund or recurring deposit six months to a year before the term ends.

Just that you would have to pay tax at slab rate if you redeem from debt funds in less than three years.

Bose feels the performance of a fund can be reviewed on a quarterly basis, but portfolio should be tweaked not more than once or twice in a year.

How have peers performed? He adds you should also judge the performance of a fund relative to that of its peers, keeping the performance period constant - in case you check fund A's performance through the last quarter, you should check the performances of other funds in the same category (such as equity diversified or mid-cap funds) in the last quarter alone.

"Sometimes, investors panic seeing vast differences in returns because the performance periods were different," Bose says.

If there is a difference of two-three per cent between the annualised returns given by your fund and that given by the best-performing fund in the same category, you may not shift.

"And, even if you shift to the best-performing fund in the category, do not shift completely. Move a part of your money because your fund's low returns might be a one-off case; it might bounce back," Bose says.

Of course, if the difference in returns between the best-performing funds and your fund exceeds five per cent, you should make a complete shift.

"In markets such as the one we witnessed this year, if your fund is the only one that did not perform in a category, it needs to be done away with," says Rao.

When to make the switch? Also, it isn't advisable to switch funds every time there is big difference in the performance, as equities can swing.

Keep an eye on your fund performance on a quarterly basis. If a fund lags for more than three quarters, one should consider switching.

Annual switching is recommended because long-term capital gains from equities are exempt from tax at the end of a year.

Also, most open-ended equity funds levy an exit load (as much as three per cent of the redemption corpus) if withdrawn in less than a year. What type of fund do you hold?

"If you hold a gold sector fund, you might not want to weed it out, as this asset class has not performed in the last two years. As such, there is no point worrying about it. Let such funds be," says Ramanathan K, chief investment officer, ING Investment Managers.

More, the primary aim of such funds is not capital appreciation, but hedging portfolios.

But one has to be careful about sector funds, says Rao. "If you hold power sector funds, you have to weigh this investment in the light of the outlook for this sector.

If the outlook is bleak for the next year or more, why waste your money staying put? You will fare better by investing in another sector or a diversified fund," he says.

Move out of sector funds if you haven't seen any major movement in the past six months to a year.

Some, however, believe defensive sectors-fast-moving consumer goods, pharmaceuticals and information technology-should be held on to in small proportions, as portfolio hedges.

Do you hold too many funds? Rao says a good way of starting the weeding-out process is consolidating your mutual fund portfolio, as many investors own too many funds.

"Start with clubbing investments in various schemes into one category into the best-performing fund of the category you hold.

Say you hold fund A, fund H, fund L and fund M, all from the equity diversified category. Of these, fund H is the best-performing. Club all investments into club H. Or, you could also club smaller fund investments with the bigger ones," he says.

Similarly, those with a portfolio highly skewed towards mid- and small-cap funds could get rid of some of these on the basis of their returns, says Ramanathan.

This is because while these funds run up in a good market, these fall equally quickly in a bad market, as this category invests in high-beta stocks. Therefore, these are risky.

Here's some help


• Fund performance can be reviewed on a quarterly basis

• If a fund lags behind for more than three quarters, consider switching

• If a scheme is performing in line with your expectations, leave it alone

• Also judge the fund performance relative to that of its peers in a certain fixed period

• If best-performing funds are giving two-three per cent more, shift a part of your money

• Over five per cent difference in returns with the best-performing funds means shift out

• In case of sector funds, check the outlook; if outlook is bleak consider moving out


Neha Pandey Deoras