Investors of mutual funds are advised to keep a close look on their mutual fund portfolio every month, but this important step is often skipped. Every fund house releases a fund factsheets that contain portfolios of all the schemes that they manage. These portfolio closures are mailed to investors by their respective fund house, but they casually take this. Many consider this mail as spam and put them in the trash.
They are completely unaware of this fact that these portfolio closures hold precious clues on how healthy or unhealthy they investment in mutual fund is. It is must for an investor to keep a close look on their mutual fund portfolio closure.
After seeing the investors recklessness towards their portfolio closures, SEBI recently on 5th October 2020, came up with a rigorous risk-o-meter that would indicate the risk-profile of the scheme. This new risk-o-meter will come into force next year, but till then investors need to do regulate their mutual fund portfolio by themselves.
Understand why it is necessary to have a close look on your mutual funds portfolio.
Do My Debt Fund Hold A Negative Cash Balance?
All mutual fund schemes after investing the money from investors keep a bit of cash, which is generally used to meet any sudden redemptions. Many fund managers do keep this money in the side-lines for the right opportunity to buy stocks. When this cash holding gets over, your fund borrows money from banks. Your scheme can borrow up to 20 percent of its total corpus (for additional borrowing SEBI permission is needed). The money borrowed by the scheme is reflected in its fund factsheet and is shown as a negative cash balance.
The higher this negative cash holding the worse off your scheme could be. It shows how stressed your portfolio is in the terms of liquidity.
Is The Fund Churning Too Much?
A well-run scheme is a result of a good and experienced fund manager, who makes an investment after a thorough analysis and with conviction. However, if you notice frequent exits and entries in an equity scheme, it clearly shows that the fund manager is not sure and has no clarity about his investment strategy.
So, this is another aspect that you should watch out for.
How Much Credit Risk Do Your Mutual Fund Portfolio Holds?
Investing too much in low rated bonds or bonds that are below AAA-rated can give you bad news unless they are credit risk fund. Keep a check on your debt scheme’s credit risk profile that every fund house gives in its factsheet.
How Much Diversified Your Portfolio Is?
There is difference between focused Equity Fund and Diversified Fund. A ‘focused’ equity fund specifically comes with a mandate of investing in stocks of just 20-30 companies, while a diversified fund has more diffused holdings. Investing in a focused Equity fund is not a bad idea. There are many funds manager who are very good at picking stocks, if your funds manager is one of them then your focused equity fund can generate stupendous returns. And if you fund manager is not that then it can backfire in certain markets. For both equity and debt, concentrating a large chunk of a scheme’s exposure in few companies or a single business group can be risky, and also not advisable.
Regulating your mutual fund portfolio at intervals help you take effective steps and strategies to reduce the risk in your portfolio. You can easily review your portfolio by either referring to the fund factsheet or by analyzing the portfolio closure mailed to you by your funds house or any other third party service.