Do you even have the ‘Right Mutual Funds’ in your portfolio?

 

Best Mutual Fund Portfolio

You have been investing in mutual funds for some time now.

But in last few months, 3 big changes took place. And all those changes can and will impact all mutual fund investors in big ways.

You remember the 3 changes…don’t you?

  • Introduction of Long-Term Capital Gains Tax on equity
  • Changes in existing Mutual Funds attributes due to SEBI’s categorization and rationalization push
  • Shift to TRI for performance benchmarking, which will reduce the so-called over-performance of the funds

I repeat. These are big changes.

Why?

I have already explained it in detail in the post titled MF Investors and 3 Big Changes that will Impact their Portfolio and Returns and here and here. So won’t repeat it here. But if you haven’t read these posts, please do so for your own good.

I am writing this post to bring in front some questions that need to be asked by all mutual fund investors NOW!

This ofcourse is not a comprehensive list.

But it will help you get started in the right direction. So here it is:

  • All future profits from the sale of mutual funds will attract LTCG tax. This means that you need to be careful so as to reduce the impact of this tax and allow more money to remain invested for longer (for compounding). This also means that you should be investing in funds, in which you can ‘ideally’ remain invested for long without much need of selling. So do you have such funds in your portfolio?
  • Have you been investing in flavor-of-the-season funds (or last year’s top equity fund) till now which required you to enter and exit every 1-2 years? If yes, then do you realize that this strategy may not work very well in future due to the impact of LTCG tax on each reshuffling of funds?
  • Do you understand that due to the two above-mentioned points, your portfolio should now be curated strategically to have funds that need comparatively less maintenance and can survive various market scenarios?
  • Do you know how to find such funds that fit into the above criteria (which have become more relevant now than ever before)?
  • After SEBI’s recent categorization & rationalization exercise, several funds have changed their mandates, categories, etc. This means that these funds will not be doing what they were doing till now (atleast to an extent). This also means that the returns delivered by these funds till now may not be possible in future. Do you know if these are the very funds that are still part of your portfolio?
  • Do you understand that not all funds have changed their mandates and categories in the SEBI-pushed rejig? So even though some funds may have to be kicked out of your portfolio, it is possible that many are still good enough to remain invested in. Do you know which funds?
  • Do you understand that some of the funds that you are holding may not remain in line with the asset allocation that you had initially bought them for? For example: Suppose you bought a fund that earlier was a multi-cap fund. But after the re-categorization, it has become a mid-cap fund. So going forward, about 60% of your money would be invested in mid-caps. This is not exactly what you bought the fund for. Isn’t it? Remember you bought it for its multi-cap(ness). So there will be a need to change the funds. Do you know which all of your existing funds have changed so much that they should be exited from?
  • Some of the funds, despite changing name and attributes and categories, may still be inherently doing what they were doing earlier. Therefore, no point exiting such funds. This is all the more important as exiting also means paying exit loads and additional taxes. So do you know which funds you hold are still the same even after getting their new clothes?
  • Do you know that after the change in benchmarking for mutual funds, it will be more difficult for the funds to beat their benchmarks like earlier? Fund managers will now have to work extra hard to deliver benchmark-beating returns. This will be difficult for them to manage on a consistent basis. So do you have funds that have been able to beat new TRI-based benchmarks in past? Do you even understand what I am talking about??
  • Do you understand that the two changes in combination, namely i) using TRI for benchmarking and, ii) limited universe of stocks available for fund managers to invest as per SEBI’s new guidelines, hints to the fact that more and more large-cap funds will find it difficult to beat their benchmarks? This also means that there is a case for investing in index funds for a subset of investors now. Do you realize why this might make sense for you too?

Thought provoking… Isn’t it?

Even I have reviewed my personal mutual fund portfolio in last few months and made changes where necessary.

It goes without saying that proper review of your existing mutual fund portfolio is now more necessary than ever before.

Chances are high that you may want (or have) to weed out unwanted schemes from your mutual fund portfolio as soon as possible.

I understand that you might be worried about exit loads and taxes. But these are short-term pains and frictional costs that must be borne for long-term course correction.

In fact, take it as a forced blessing-in-disguise. You are being forced to think properly about how to build a robust, all-weather mutual fund portfolio that is worth remaining invested in for several years.

So go on… identify funds that should be exited from your portfolio. Find out funds that are worth bringing in to your portfolio based on proper fund selection and above discussed questions.

Also ensure that your final fund portfolio (after all the changes) – maintains proper asset allocation, is reasonably diversified among various caps and fund houses, has funds that can be held for several years, doesn’t have adventurous funds which may cause regret in future, and most importantly is built on common-sense.

This is an opportune time for you to build a mutual fund portfolio wisely and safely and that is well-positioned to create wealth and achieve your financial goals.

Written by Dev Ashish

Founder - Stable Investor Investing | Personal Finance | Financial Planning | Common Sense

4 comments

  1. The trouble is, beginning April 2018, one is forced to pay a heavy price whenever one tries to rebalance the portfolio. We run the risk of seeing our portfolio eroded by a little over 10 percent- thanks to tax on long term capital gain. We also pay LTCG whenever we sell MFs to achieve our long term goals. Thus, building a portfolio, carefully pruning it, and ensuring that it flowers and bears fruits has become a challenging task for most investors. We need experienced and skilled gardeners who can keep the financial grass green-come rain or shine.

  2. The impact of LTCG tax can be huge over decades. It might help to have some numbers:

    – 12% returns in a single fund over 30 years leads to 27x returns after LTCG
    – 12% returns but the amount is redeemed and re-invested every year over 30 years leads to 21.68x returns after LTCG. That’s over 20% lower returns at the end! Of course, the real world is messier, and if you keep cycling through funds every year, LTCG tax is probably not your biggest problem!

    1. though if your existing fund gives you return below category average then it makes sense to change your fund and pay LTCG. With that you’ll earn more rather than staying in your looser fund.

Leave a Reply