How to clear junk from your mutual fund portfolio this Diwali

The festive season of Diwali is a good reminder to filter out the junk from mutual fund portfolios, as many return-hungry investors end up chasing hot topics in a dynamic market.

Mutual fund advisors say that periodic rebalancing ensures that the portfolio remains aligned with the investor’s risk appetite and long-term goals. Regular assessment, at least annually, keeps the portfolio on track and ensures a well-balanced mix across categories.

“This disciplined approach reduces the temptation to over-allocate to newly high-performing categories, thereby preventing unnecessary risk from entering. Investors should also evaluate overlaps in holdings within the same category, as too many funds in one space can dilute returns and increase redundancy,” said Sagar Shinde, vice president of research at Fisdom.

Also read | Equity mutual funds offer returns of up to 74% since last Diwali. Chart of highest returns from sectoral funds

Of the 459 equity schemes that exist in the market since last Diwali, the toppers have offered returns of up to 74%. The benchmark indices – Nifty 50 and BSE Sensex – have gained around 26.91% and 24.35%, respectively, since last Diwali. Out of these 459 equity schemes, around 30 schemes offered less returns when compared to BSE Sensex (return less than 24.35%).Mutual fund investors often invest in the schemes after observing recent stellar performance and miss out on underperformance, if any. But the important thing to know is what to do with schemes that perform poorly over a very long period of time.

The expert recommends that if the scheme continues to underperform for one or two years without any external factor affecting the performance, then the investor should exit that scheme and reinvest in more promising schemes.

“If a mutual fund scheme performs poorly over a long period, it is essential that investors conduct a thorough evaluation. Start by comparing the fund’s performance to relevant benchmarks and peer funds in the same category. If poor performance persists for a year or two and no external factors (such as broader market downturns) explain the delay, it may be time to exit and reinvest in more promising funds,” Shinde recommended.

“Maintaining these poor performances due to inertia or hope of recovery can negatively impact the portfolio’s overall returns. It is more beneficial to replace these schemes with others that better align with your financial objectives and risk appetite,” he added.

On the other hand, if the fund’s poor performance is due to temporary market factors and the fund’s strategy is aligned with long-term objectives, the expert recommends maintaining investment in such schemes.

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“If poor performance is due to temporary market factors and the fund’s strategy is aligned with long-term objectives, staying invested may still be worthwhile. A strategic approach consists of redeeming in tranches, minimizing the impact of outgoing charges and mitigating market timing risks. This allows investors to gradually rebalance the portfolio while capitalizing on any potential recovery in the meantime,” said Shinde.

According to the September monthly data released by the Association of Mutual Funds in India (AMFI), 27 mutual fund NFOs were launched which together raised Rs 14,575 crore, with the highest contribution from sectoral/thematic funds at Rs 7,842 crore. rupees.

Investors often invest in NFOs without aligning them with their risk appetite and objectives as the investment can be made at Rs 10. If you have invested in NFOs that are not aligned with your objectives or risk appetite, you should adopt a A structured approach that includes assessment assessing the fund’s role in the overall portfolio and proceeding accordingly is what the expert recommends.

“If investors discover that the NFOs in their portfolio are not aligned with their risk appetite or long-term objectives, they should take a structured approach. First, evaluate the performance and role of these NFOs in the overall portfolio. If the fund does not provide significant diversification or introduces unnecessary risks, it is advisable to exit and reallocate to more suitable funds,” recommended Shinde.

“NFOs launched with a thematic or sectoral focus often exhibit greater volatility and are sensitive to market cycles. In these cases, it is reasonable to wait for the cycle to complete, as long as the investor is comfortable with the risks”, he added.

Please note that sector or thematic funds are not recommended for new or inexperienced investors. These schemes are extremely risky and volatile and their success depends entirely on the outlook of the sector or theme. Each sector or theme rises or falls in certain phases of the economy.

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Three NFOs of diversified equity funds (multi cap, large & mid cap and dividend yield fund) together raised Rs 2,031 crore in September. If these diversified fund NFOs are not aligned with your risk appetite and objectives, you should follow the same approach and exit if necessary, as holding such funds dilutes returns over time.

“If the NFO is a more traditional, diversified fund (e.g. large cap or flexi-cap) and has consistently underperformed, follow the same rules as regular underperforming schemes: compare with category peers, assess whether the fund is aligned with your strategy, and exit if necessary,” said Shinde.

According to the expert, one should avoid investing in NFOs based on marketing or other factors. Instead, you should try to align them with your financial goals and risk profile.

“For future investments, it is important to avoid investing in NFOs based on news or marketing news. Instead, focus on alignment with financial goals and risk profile. Diversification should be significant, not excessive, ensuring that each fund contributes to portfolio growth without adding unnecessary complexity,” advised Shinde.

DIY investors often become overweight in some categories and the portfolio is not aligned with the desired asset allocation strategy. Overweighting in any specific category increases concentration risk and vulnerability to market cycles.

The expert recommends that after carefully evaluating the overall portfolio, if you are overweight in any specific category of mutual funds, cut the excess exposure and rebalance the portfolio with your desired asset allocation strategy.

“If a portfolio is overweight in a specific category – such as large-cap, mid-cap or sector funds – this introduces concentration risk, which can affect overall returns and increase vulnerability to market cycles. To address this issue, investors must reduce excess exposure and rebalance the portfolio to align with the desired asset allocation strategy,” advises Shinde.

“An important consideration is that each category – whether large-cap, mid-cap, small-cap or sector – goes through phases of outperformance and underperformance over time. For example, large caps can provide stability in turbulent markets, while mid- and small-cap companies can outperform during bull runs. Therefore, sticking to a pre-defined asset allocation helps maintain portfolio integrity and mitigates the risks of chasing short-term performance trends,” he added.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times).

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