Strategies to manage your mutual fund portfolio

Have you ever given thought to the importance of managing your mutual fund (MF) portfolio? MF investment is simple and easy, but even the simplest of investments need some management from time to time to ensure that these investments are aligned with your financial goals. Mutual fund portfolio management strategies can ensure that your funds deliver the best possible results.

Begin on the right foot

When you start to invest in mutual funds, you should ensure that you start on a firm footing. This means you should ensure that the fund’s investment strategy is in line with your goals and the fund manager’s pedigree is impeccable. Further, you should always invest in only a limited number of funds, so that monitoring your portfolio does not become cumbersome.

Understand how to gauge fund performance

When you invest in mutual funds, keep in mind that Net Asset Value (NAV) is different from stock prices. NAV is determined by the mutual fund house by subtracting the liabilities of the fund from its assets. NAV is a barometer of the fund’s performance and allows investors to see real increase or decrease in the value of the fund. NAV calculations are made at the end of each trading day. Share prices on the other hand, fluctuate throughout the trading day as they are determined by market forces. Share prices move due to demand and supply.

Have a strategy

Many new investors start investing in mutual funds without any game plan. To achieve your financial goals, plan your investment strategy before making your investments. Two simple strategies that investors can consider and implement are – Buy and Hold as well as Performance Weighting.

  • Buy and Hold – Buy and hold assumes that markets rise about 75% of the times and fall about 25% of the times. The strategy is based on the premise that given enough time, if you hold your investment through the falls, time and statistics will work in your favour.
  • Performance Weighting: This strategy is an active management approach and involves keeping a close watch on markets. Depending on the prevailing market conditions, you are required to rebalance or make adjustments to your mutual fund portfolio. The idea is that you carry out timely portfolio management and cash in your gains from well performing MFs from time to time. As for the poorly performing funds, a better understanding of market cycles should give you a reasonable idea about when these could transform into gainers and give you the patience to hold out.

Learn the magic of compounding

When and if you receive dividends and generate profits on your investments, you would gain if you reinvested them and harvested compounding returns. For instance, if you reinvest monthly dividends of Rs 1,000 over 10 years at 12% investment return, your reinvested dividend corpus will grow to about Rs. 2.32 lakh at the end of 10 years (compounded monthly).

To summarize, having a portfolio management strategy is better than having none; however, what is most required is a sense of discipline, regularity and the ability to act without emotion. A plan and discipline can do more than anything else because at the end of the day, to invest in mutual funds is not rocket science.

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