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Have you reviewed your MF portfolio?
Feb 18, 2011

It's common saying - "make hay when the sun shines". And that's exactly what all manufacturers of investment products do; and it's no different for Asset Management Companies (AMC) - mutual fund houses too. They launch new investment products when the sentiments in the capital markets are booming, and don't really bother to introduce them during gloomy days.But have you wondered why so? The answer is simple. They play on your psyche, by being aware of the fact that not many of you would invest when the capital markets are looking gloomy or when overall sentiments in the capital markets are downbeat. Hence, generally all launches of new investment products are introduced (with off course enticing ad campaigns) when there's a euphoria in the capital market.

Speaking about the new products launched by them, in our opinion not all of them are unique. In fact most of them are unnecessary, aimed at garnering more AUMs (for being in the rat's race of garnering AUM) rather than meeting the objective of creating wealth for you investors. Also, in our opinion these unnecessary product launches put pressure on the fund managers to manage more number of schemes thus hindering their effective performance in managing in each scheme.

But, in this bargain intermediaries such as distributors / agents/ relationship managers for sure meet their objective of wealth creation (as distributors / agents earn hefty commissions, and relationship managers get a variable pay on the investment product sold to you). Even during the times when there aren't many new product launches in the market (due to various reasons) these unscrupulous lot bred by the AMCs, keep advising you to do high portfolio churning. To simply put, they would tell you disinvest from one scheme and invest in another. And to convince you on this, they would give you a picture of the market scenario, tell you the need for rebalancing (without him really understanding what it means!) classify your risk profile (the unsystematic way!) etc.; and see to it that you adhered to advise provided.

Please recognise it's your hard earned money which you are investing in the markets, and hence you need to probe a little deeper before act on the fabulous persuasive sales pitch given by your distributors / agents / relationship managers. And if you don't delve deeper, you would be digging your own grave by adding junk or unwanted schemes in your portfolio. Remember, your distributor / agents / relationship managers would make his dough, and you would be adding some junk schemes to your portfolio which may erode wealth for you, rather than create it. Similarly, acting on what your friends, family members, colleagues too is not going to be of any great value to you.

And now most of you would arrogantly say, "So what - I'm diversifying adding more schemes!" But is this how diversification is done? In our opinion just adding schemes just as per the unsystematic advice of your agent / distributor / relationship manager is not "diversification", but in fact "diversity". And as what Mr. Warren Buffet (Chairman of Berkshire Hathaway, U.S. and one of world's richest investor) rightly said, "Wide diversification is only required when investors do not understand what they are doing." So, is it that you investors do not understand what you all are doing? If yes, you've got to learn and research more while investing in schemes.

Remember while you diversify, you tend to reduce your risk. But when you "over-diversify", you tend to limit your return on investment. In case of mutual fund schemes, they already are a heaven for diversification, and hence your only job as an investor is to have just the right amount of schemes of different types (say 1 or 2 under each type), by giving importance to financial planning aspects such as the following:


Your age should determine which type of mutual fund scheme (whether equity or debt) you should invest. So, if you are young you can allocate a major portion of your investible amount towards, equity schemes and rest towards debt and gold schemes. This is because your tenure of working life is greater, as compared to a person who is nearing retirement. Similarly, if you start early the tenure which you get while investing in an investment avenue is greater, which enables one to make more aggressive investments and create wealth over the long-term to meet your financial goals.


If your income is high, your willingness to take risk is high. This thus can work in your favour, as you have sufficient annual income which allows you to park more money into the equity asset class (through equity schemes), for generating higher returns and creating a good corpus for your financial goal. Similarly, if you aren't earning a high income, but have age on your side (by being young) you may still indulge in equity allocation through the SIP mode in mutual funds which would provide you, the ability to create a corpus to attain your financial goal through power of compounding, and at the same time manage the volatility of the equity markets through rupee-cost averaging.

Nearness to financial goals

While investing if you are earmarking some amount to meet your particular financial goal, then your nearness to that financial goal would also determine how you should allocate your investment, inter as well as intra asset class. So, say you have a financial goal of getting your daughter married well after 20 years from now, with an amount requirement of say ` 50 lakh, you would require to start with a monthly SIP amount of ` 3,300 in a mutual fund which offers you return of at least 15% p.a.

Risk Appetite

The term risk appetite refers to your ability to take risk; which is function of your age, income, expenses and nearness to financial goals. So, if your willingness to take risk is high (aggressive), you can skew your portfolio more towards the equity schemes. Similarly, if your willingness to take risk is relatively low (conservative), your portfolio can be skewed towards debt mutual fund schemes or large cap schemes, and if you are a moderate risk taker you can take a mix of 60:40 (into equity and debt respectively) by opting for a balanced fund.Indicative portfolio category allocation based on risk appetite

Large CapMediumHighHigh
Mid CapHighLow-
Flexi CapMediumMedium-
Gold ETFsVery LowLowMedium
(Source: PersonalFN Research)

Please recognise that holding too many mutual fund schemes, with similar objective is not a prudent idea, also going with star ratings is not a great idea as these stars may lose their sheen during gloomy days of the capital markets. It's okay for business channels and pink papers to disclose star rated funds, as publishing those increases their TRP ratings. The big question which you should be asking yourself is - would my investment portfolio shine like a real "rock star". And if you want it to be dependable (which we believe every prudent investor wants it to be!), your portfolio should constitute of sufficient schemes which can stand by you through health and sickness.

Moreover it is noteworthy that, you just don't need to churn funds from your portfolio, if you have consistently good performing schemes in your portfolio. Churning would just not do any good to you. But sure for your distributor / agent / relationship managers, it would make their dough as they would be earning enticing commissions. Remember, while everyone's there to give advice, what matters is whom you take it from. Think hard on this! Do not let your hard earned money go down the drain for free advice or tips.

Please recognise that buying investment products is not like buying grocery and vegetables - a thorough assessment of your risk appetite and time horizon is vital to determine which mutual fund really fits in your portfolio. In the past if you have found yourself trapped into the clutches of your distributor / agent / relationship manager who's interested in making his own money through hefty commissions and variable pays, it's time that you review your mutual fund portfolio. An effectively drawn portfolio review from a research driven mutual fund expert would help you to assess the following:


While your distributor / agent / relationship manager may have pushed you schemes just based on their returns, a portfolio review would help you assess the degree of risk which your portfolio is exposed to - whether high, average or low, thereby assessing whether the schemes(s) have justified their risk taken by providing appealing returns.

Moreover if you holding some junk schemes or bleakly shining star-rated funds, the review would also recommend an action to be taken - whether hold or sell, along with enough reasoning for the same. In fact the performance track record would reveal the same.

Fund categorisation

Apart from the above, a well drawn portfolio review would also categorise your holdings on the basis of the type of schemes held by you (i.e. whether equity, debt or gold) as well as the style of investing followed by them (i.e. whether growth, value and blend) and the market cap bias followed- i.e. large cap, mid cap, small cap, micro cap, flexi cap, multi-cap etc. A vigorous portfolio review would also help you take a call on sector and thematic funds as well, apart from the diversified ones.

Sector classification

As many of you would be interested in knowing, the composition of each sector to your portfolio, a high-quality portfolio review would help you in knowing exactly how much percentage of your total portfolio is skewed towards which sector(s), thereby enabling you to further assess the sector specific risk which you are exposed to.

Top 10 stock holdings

Yes sure, knowing your inquisitiveness to know what would be the stock holdings of your total mutual fund schemes, a full-bodied portfolio review would also provide you top 10 stock holdings of the all the schemes in your portfolio. This would help you assess how much percentage, is held by your fund in each stock, thereby giving you a fair idea what the fund managers are betting on.

But remember, all this can be provided by a mutual fund expert, who follows a research driven process to select funds (rather than arbitrary methods), and the one who understands your profile and needs, and accordingly helps you create and manage your mutual fund investments.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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