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Mutual Fund performance should be reviewed

, September 2, 2015, 0 Comments

Aditya will be retiring now at the age of 60. He was on deputation to Colombo by his employer from 2008. He is having a portfolio of mutual funds which is meant for his retired life. He contacted me last week for his retirement planning. On reviewing his portfolio, I was shocked to see an investment of 10 lakhs in Reliance Diversified Power Sector Fund.

What is wrong with Reliance Diversified Power Sector Fund?

This is a sector fund which invests mainly in companies in the power sector. The power sector is not doing well in India for the last 7 years. The fund was performing very well till 2008. Net asset value of this fund was grown from 36.7563 to 82.3703 in the 12 months period from 1st January 2007 to 1st January 2008. This one-year return of 124% was the reason why Aditya invested 10 lakhs just before going to Colombo in January. 2008. The agent assured a similar return in future too! Since he was busy in his project at Colombo, he never reviewed the fund performance in these 7 years.

Aditya was expecting at least 35 lakhs from this investment after 71/2 years. After verifying the fund value, I find it very difficult to tell the old man that the investment of 10 lakhs made 71/2 years back is worth 9.13Lakhs only as on 12th August. 2015. The Net Asset Value (NAV) of the fund is only 76.9697 now. Had he invested in fixed deposit, he may get around 18 lakhs now!

The NAV of this fund after the 124% growth in 2007-2008 was never growing. In the 2008 crash, the NAV was shattered to 36.7172 in December 2008 and it was volatile after that. The bad performance of the power sector in these 7 years was one of the reasons for this poor performance.

Review of mutual fund is a must

Yes, mutual funds are the ideal investment option for long-term wealth creation. But there is a need to review the fund performance and make changes if required.

The Indian Mutual Fund industry is flooded with thousands of funds. It is really difficult for an investor to identify good funds. Within the same fund house, you can see funds which are consistent performers and poor performers.

From the above chart, you can see that the top performer has given more than double the return compared to the low performer. The above list is indicative and there are many funds that are below this and above this. We cannot expect all the funds to perform consistently. It is in the interest of the investors to review the performance regularly.

Performance of Mid & Small Cap Funds during the last 7 years

The below-given chart gives the 7 years SIP return of selected Mid & Small Cap funds as on 12th August.

Performance of Large & Mid Cap funds during the last 7 years

The following chart shows the performance of selected 8 funds in the Large & Midcap category. The chart gives the value of Rs. 1000/- SIP from 1st September 2008 to 1st August 2015. The total amount invested during these 84 months is 84,000. The value is taken as on 12th August. 2015.


You can see in this case also, the top performer return is more than double compared to the low performer.

How to select a mutual fund to invest

First thing is not to invest in a fund based on the recent high performance. It may change in the near future. The fund selection should be based on many factors like long term consistent performance, track record of the fund manager, investment philosophy of the fund house, fund management charges etc.

How to review the fund performance

Don’t follow the fill it, shut it and forget it; strategy with mutual funds. It is your hard earned money and you should spend the time to review the fund performance. There is no need to review the performance regularly. But it should be done on a quarterly basis.

If your fund is going bit slow for a quarter, there is no need to worry. But if the underperformance continues in the second quarter also, there is a reason to worry. But give some more time for the fund manager to prove his bet. If you see that the fund is underperforming continuously for 3 quarters, there is a reason to change the fund. At this stage, you can stop the SIP and start SIP in another good fund. You may exit the accumulation from the old SIP after 1 year without any exit load and tax implication.

Get professional help, if you cannot do it yourself

If you cannot do it yourself, engage a professional for this. He will help you in identifying good funds to invest and will do the periodic review. It is better to engage a fee-only financial planner because he can recommend you direct plans in mutual funds. Direct plans can give you better returns because of the low fund management charges. This extra gain will more than compensate for the fee paid to the fee only planner. You can get the list of fee-only financial planners in India from the SEBI website.