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POSTED BY ON January 18, 2013 10:20 am COMMENTS (2)
What does one mean when one says that it requires to monitor fund performance once in every 6 months and re-balance the portfolio? For example, let’s say, one stays iinvested in Fund A for a long period of about 5 years and the fund has been generating good returns until now. If that Fund A’s performance starts going downhill in the next 6 months even though the market is going uphill, should the investor sell all the units of Fund A and invest the proceeds in a top performing Fund B, which has been a top performer of the year or should the investor leave the units of Fund A as it is and stop further investments in it and start SIP of a top performing Fund B? Please clarify. Thanks.
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Look into the reasons for the underperformance of the fund.
For that you need to know:
1. The particular benchmark of the fund. Is that the same as the headline benchmark (=usually nifty / sensex).
2. Is the underperformance because of bad calls or bad portfolio alignment as compared to the benchmark or what. This is if you can find that out and analyse yourself. If not, leave it. You need to understand that if you have opted a fund which can because of its management style outperform its benchmark, in a different timeframe and because of the same style, it is underperform too.
3. Has the management style of the fund changed drastically (=change in fund manager team without proper training of the next in line OR change in style / mandate OR any other significant qualitative changes).
4. Different styled funds work differently at different times of market cycles, provided the styles are consistent (for inconsistent style funds, you can never predict, so not much to analyse in them).
5. Re-balancing is different thing from fund monitoring and is entirely based upon your asset allocation percentages and your own stomach power!!
What does rebalancing a portfolio mean? You can read more about it and pay with a rebalancing tool here:
http://freefincal.wordpress.com/portfolio-rebalancing-simulator/
Basically rebalancing is done to ensure the equity:debt ratio is maintained according to the investors risk appetite and also for periodic profit booking.
Since your fund has provided good returns in the last 5 years and has only underperformed recently you should wait and watch. If it continues this way then you need to consider switching.
Consistent performers with a good track record should be chosen first. Only should not go with top rankers of each year.
If I have planned a goal with 10% annual return and if my fund consistently provides mores than this even though relative to other funds it has not performed well I will not shift.
Yes I will watch it carefully. If it begins to slip for more than year then I will start shift.
Remember if you have a SIP going abrupt switch will invite tax for sip transaction less than a year old in equity funds. So first step is to stop further transactions and then switch older transactions