New Year celebrations continued on Dalal Street as the S&P BSE Sensex scaled to a new high on January 21, 2021, and crossed a major psychological milestone of 50,000 points.

The Indian equity market has come a long way since the S&P BSE Sensex –a 30-scrip free-float market cap index — was launched on January 2, 1986, with the base value of 100. Over the last 35 years, India’s bellwether index has yielded a Compounded Annualized Growth Rate (CAGR) of around 20% — an enviable return by any standard. It reinforces the popular saying: Time in the market matters more than timing the market.

That said, I caution you against holding onto your equity mutual fund investments for the long haul without taking stock of their performance and ensuring that they remain relevant for you.

Just because you stick to equity mutual fund schemes for a longer time frame, doesn’t necessarily mean it will prove highly rewarding.

You will be surprised to know, certain diversified equity mutual funds have underperformed the Nifty 500 Total Return Index (TRI) on an average over the last 1-year, 3-year and 5-year time periods. The outperformance of the equity category as a whole has occurred only on 7-year, 10-year and 20-year time frames. Here as well, the data is interesting (See Table 1): Not all equity mutual fund schemes have been able to outperform the Nifty 500 TRI.

Table 1: Selecting the right mutual fund scheme matters…

	Time frame
	1 Year	2 Years	3 Years	5 Years	7 Years	10 Years	20 Years
Number of diversified equity schemes considered for analysis	180	164	152	145	133	124	32
Number of schemes outperforming the Nifty 500 TRI	56	67	33	30	74	76	21
Percentage of outperforming schemes	31%	41%	22%	21%	56%	61%	66%

Data as of January 21, 2021
(Source: ACE MF, PersonalFN Research) 

Moreover, some of the industry’s oldest equity mutual fund schemes have disappointed investors despite a remarkable rally of the Indian equity markets. Out of 32 schemes that have been in existence for 2 decades or more, only 1 scheme has been able to make it to the top-10 list of diversified equity schemes on a 3-year time period.

Table 2: Top-performing equity diversified funds

Scheme Name	Inception Date	Absolute (%)	CAGR (%)
		1 Year	2 Years	3 Years	5 Years	7 Years	10 Years	20 Years
Axis Bluechip Fund	January 5, 2010	21.4	20.3	15.1	17.4	16.3	13.5	–
IIFL Focused Equity Fund	October 30, 2014	27.4	27.7	15.0	19.2	–	–	–
UTI Equity Fund	May 18, 1992	33.3	23.4	15.0	17.6	17.2	14.0	17.1
Quant Active Fund	March 20, 2001	46.8	25.4	14.8	18.6	21.6	14.0	–
Axis Multicap Fund	November 17, 2017	20.2	19.2	14.7	–	–	–	–
Canara Rob Bluechip Equity Fund	August 20, 2010	26.1	21.3	14.4	17.3	15.6	13.0	–
Axis Midcap Fund	February 18, 2011	26.4	22.1	13.5	17.7	20.8		–
Quant Small Cap Fund	October 16, 1996	73.6	19.5	13.2	10.8	10.5	9.1	–
PGIM India Diversified Equity Fund	March 4, 2015	37.2	25.3	12.2	16.4	–	–	–
Canara Rob Equity Diver Fund	September 16, 2003	24.5	18.8	12.2	16.6	15.4	12.6	–
NIFTY 500 – TRI	–	21.6	15.8	8.6	15.9	15.0	11.4	15.2

Data as of January 21, 2021
(Source: ACE MF, PersonalFN Research) 

Does that mean equity mutual fund schemes featuring in Table 2 are the ideal ones for your portfolio? Not necessarily.

It would be unwise to lay too much emphasis on the returns generated by any equity mutual fund scheme in the recent past and invest in it, expecting that the past performance might repeat in the future as well. That may not be the case.

To understand how an equity mutual fund scheme would perform in the future, evaluate how the scheme has fared across market cycles (bulls and bears), and it is worthwhile looking at some of the qualitative aspects such as the following:

• The top-10 holdings
• The top-5 sector exposure
• How concentrated/diversified is the portfolio
• The market capitalisation bias
• The style of investing followed – value, growth, or blend
• The level of portfolio churning that the fund manager indulges in
• The proportion of Asset Under Management (AUM) actually performing (to check for fund management efficacy)
• The credentials of the fund management team (including the track record of the fund manager and the number of schemes he/she manages)

Besides this, understanding the investment philosophy, processes, and systems of the mutual fund house will prove useful.

At PersonalFN, we follow a comprehensive S.M.A.R.T Score Matrix wherein we evaluate…

• S – Systems and Processes
• M – Market Cycle Performance
• A – Asset Management Style
• R – Risk-Reward Ratios
• T – Performance Track Record

This has helped our valued mutual fund research subscribers to own some of the best equity mutual fund schemes in the investment portfolio with a commendable long-term performance track record.

At a market high, here are seven mistakes you should avoid committing:

Mistake #1: Expecting the market momentum to continue in the future as well

Markets have jumped almost vertically from their March 2020 lows. With the trail P/E of the S&P BSE Sensex around 34x, certainly, valuations do not look cheap –in fact, they are in the overbought zone. The chances of a 5-10% correction from the current levels and volatility cannot be ruled out because valuation-wise markets have run much ahead of the fundamentals.

Do not assume that the equity markets would move upward in a linear manner. When approaching equity mutual funds now, thoughtfully set up a strategy that will help your portfolio weather the turbulence on to the journey of wealth creation. Ideally, follow the ‘Core & Satellite’ strategy to invest in equity mutual funds at a market high.

The term ‘Core‘ applies to the more stable, long-term holdings of the portfolio, while the term ‘Satellite’ applies to the strategic portion that would help push up the overall returns of the portfolio, across market conditions.

Your ‘Core’ holding may comprise around 65%-70% of your equity mutual fund portfolio and consist of Large-cap Fund, Multi-cap Fund, and a Value Style Fund. Whereas the ‘Satellite’ portion of the portfolio could hold around 30-35% in a Mid-cap Fund, Large-cap & Mid-cap Fund, and an Aggressive Hybrid Fund.

Following this time-tested strategy (followed by some of the most successful equity investors) will provide optimal diversification, help you benefit from a variety of investment strategies, reduce the risk of constant portfolio churning, reduce the risk to your portfolio, and potentially outperform the market.

Mistake #2: Investing in an ad hoc manner

Do not invest in mutual funds in an ad hoc manner expecting the market momentum to continue in the future.

Similarly, if you have been following the investment advice of your next-door neighbour, colleagues, friends, relatives, etc. who may be incompetent to give prudent advice, or you simply mimic their portfolio; it may prove costly.

[Read: Why Mimicking Your Friend’s Investments Can Be Risky]

Please don’t forget, investing is an individualistic exercise and requires a serious customised approach. Each one’s risk profile, investment objective, investment time horizon, and financial goals are different. You need to make investments that are best suited for you.

Mistake #3: Choosing mutual funds schemes based on their short-term outperformance

Short-term performance can be quite misleading at times. For instance, it took just 32 trading sessions for the BSE Sensex to reach from 45,000 to 50,000 points mark. During this period, several small and mid-cap companies rallied remarkably. If you got swayed away by these market movements and entered a mid-cap or a small-cap fund in hopes that such swift rallies might continue going forward, that could be a wrong assumption. Remember, a rising tide lifts all boats.

Evaluate the valuation matrix of the stocks and the portfolio characteristics in case of an equity-oriented mutual fund scheme, and how these avenues have fared across market cycles (bull and bear). Do note that the past short-term (and also long-term) performance is in no way indicative of the future returns.

Mistake #4: Exiting equity mutual fund schemes just because they didn’t do well in the recent rally

In the current market rally, not all equity mutual fund schemes have fared handsomely -even though their underlying fundamentals may have been respectable. If you have been holding quality diversified equity mutual fund schemes in the portfolio, do not rush to dump them solely based on their short-term underperformance.

At times, what may look ‘valuable’ is overlooked by the markets to chase ‘growth’. However, that does not make a fundamentally sound equity mutual fund scheme bad per se. It may be unwise to gauge the performance over the short-term and miss the bigger picture.

That being said, persistent underperformance year after year, needs to be dealt with seriously. If that’s the case, cull out those underperforming schemes before they further derail your wealth creation journey.

Mistake #5: Increasing exposure to mid-caps and small-caps funds

Mid and small-cap funds are suited only if you have a very high-risk appetite while you endeavour to generate superior returns. When the equity markets are overheated and the valuations in the mid and small-cap domain have zoomed since March 2020, unduly high exposure in these market capitalisation segments may not be appropriate. If the bellwether index corrects sharply (from the current levels), mid and small-caps may plunge much more than large-caps and erode wealth.

[Read: Will Small-cap Funds Continue to Do Well in 2021?]

Hence, do not go gung-ho while investing in mid and small-cap funds now; instead follow the Core & Satellite approach.

Mistake #6: Discontinuing Systematic Investment Plans (SIPs)

Becoming over-cautious and pausing or stopping regular investments is not a good idea either, as it may not help you achieve your envisioned financial goals. Going forward, even if the market hits turbulence and volatility increases, you should continue to invest regularly, systematically, and strategically.  Volatility is the very nature of the equity market. It is how we use it to our advantage, perceive the situation sensibly, and devise an efficient strategy that decides our investment success.

Systematic Investment Plans (SIPs) in equity-oriented mutual funds could prove meaningful to manage the volatility due to the inherent rupee-cost averaging feature of SIPs while you endeavour to compound your hard-earned money.

Download and read PersonalFN’s Money Simplified Guide — SIP: A Rewarding Strategy

Mistake #7: Ignoring the importance of a portfolio review and rebalancing exercise

Over a certain period of time, it is possible that your financial circumstances have changed, personal risk profile has altered, outlook on money is different, personal investment objective has changed, inflation is galloping at a greater pace (than you expected), you wish to adopt a new investment style, and it is not too long before certain envisioned financial goals befall. These factors warrant a portfolio review and rebalancing, particularly at the peak and troughs of the markets.

If you seek professional advice to review and rebalance your mutual fund portfolio, it may help you…

• Align the investments as per your risk profile, investment objective, the envisioned financial goals, and the time in hand to achieve those goals
• Incorporate changes in cash-flows
• Reset the asset allocation within the limits best suited for you
• Help optimally structure and diversify the portfolio (which is one of the basic tenets of investing)
• Facilitate portfolio consolidation and rebalancing
• Weed out consistently underperforming and unsuitable investment avenues
• Ensure adequate liquidity of the portfolio
• Potentially improve the risk-adjusted return of the portfolio
• Make sure you are on track to accomplish the envisioned financial goals

The Union Budget 2021 will be one mega event, which everyone will keep an eye on amidst the COVID-19 pandemic. Subject to announcements in the Union Budget 2021, the Indian equity markets may move either way — further up from the current levels or correct. It is beyond anybody’s guess and control right now. Whichever way the equity market goes, make it a point to review and rebalance your portfolio to ensure that it remains in line with your financial objectives under all circumstances.

If you conduct a comprehensive portfolio review now, it could prove to be an effective antidote that will help you deal with the risk of a deadly pathogen and various other impending factors detrimentally impacting your investment portfolio.

This article first appeared on PersonalFN here