The Indian equity markets are scaling new highs at frequent intervals. Moreover, markets have been scaling up without any major correction over the past 18 months now. From its March-2020 lows, the S&P BSE Sensex has rallied 127% on a closing basis, whereas the S&P BSE Midcap and S&P BSE Smallcap have posted a stellar absolute return of 158% and 216%, respectively, as of September 17, 2021. And despite such massive up moves, there are no signs of tiring. Currently, the bellwether index—-the S&P BSE Sensex—-is just about 2% away from touching an important milestone of 60,000 points.

At this juncture, you might be wondering whether should you book profit or invest further in the best equity mutual funds to maximize wealth creation. In my view, as the markets are at lifetime highs, it would be wise to revisit your asset allocation plan and review your mutual fund portfolio to make suitable changes, if necessary.

Graph: Indian markets are enjoying a smooth ride


Data as of September 17, 2021
Note: The graph depicts the value of Rs 10,000 invested in BSE Sensex, BSE Midcap and BSE Small-Cap each on March 23, 2020
(Source: BSE, PersonalFN Research) 

Some of the key reasons why the Indian equity markets have staged such an unprecedented rally are:

  • Accommodative monetary policy actions and stance adopted by the major central banks of the world amid the COVID-19 pandemic
  • Sustained buying by domestic investors and overall positive participation by the Foreign Portfolio Investors (FPIs)
  • Stimulus packages announced by the government to support the economy amid the pandemic
  • A slew of reforms and Production Linked Incentive (PLI) schemes introduced by the government
  • Brighter prospects for the economic growth after the second-wave of COVID-19 and resumption in economic activity
  • Encouraging corporate earnings in the last couple of quarters
  • Rise in exports.
  • A buzzing IPO market with many issues listing at a handsome premium
  • Receding cases of new COVID-19 cases in India
  • Increase in the inoculation rate
  • Improving consumer confidence
  • The approaching festive season

Against this backdrop, it is imperative for you, the investor, to see how your mutual fund portfolio has performed at a time when markets are enjoying their dream run. If you find any underperformer or a laggard in your portfolio, you should carefully assess the reasons for the underperformance.

Let’s first see how the performance of various mutual fund categories has been across various timeframes:

  • Dividend Yield Funds and Large-cap Funds have underperformed the S&P BSE 500 index across timeframes. This is an indication that the markets have highly rewarded mid-sized high-growth companies disproportionately in the present market rally.
  • Contra Funds, Multi-cap FundsMid-cap Funds, and Small-cap Funds have outperformed across time periods. This is a reflection of a broad-base sustained rally.
  • Value Funds have outperformed only over the last 1 year and on a 7-year timeframe, which indicates that their long-term performance is also shored up by the recent performance. It appears that value investors are now showing concerns about the market valuations.
  • For the rest of the categories, it’s been a mixed bag.

Table 1: Performance of various fund categories

Category Absolute average returns (%) Average CAGR (%)
1 Year 2 Years 3 Years 5 Years 7 Years
Contra 64.9 35.3 18.9 17.6 15.8
Dividend Yield 58.8 32.0 16.6 15.4 13.0
Flexi Cap Fund 57.6 31.2 18.2 16.1 14.4
Focused Fund 57.3 31.5 17.6 16.0 14.6
Large & Mid Cap 61.8 33.5 18.3 16.4 15.5
Large Cap Fund 53.9 28.5 16.8 15.1 13.5
Mid Cap Fund 67.6 40.7 21.0 17.4 16.9
Multi Cap Fund 67.9 35.2 20.3 17.2 15.6
Small cap Fund 81.4 49.1 22.7 18.8 18.3
Value Fund 61.5 31.0 15.1 14.5 14.1
S&P BSE SENSEX – TRI 53.0 28.5 17.5 16.9 13.2
S&P BSE 500 – TRI 59.0 32.0 17.2 16.5 14.0
S&P BSE Mid-Cap – TRI 68.7 38.2 16.8 15.1 15.5
S&P BSE Small-Cap – TRI 83.9 49.0 20.0 18.0 15.0

Data as of September 17, 2021
(Source: ACE MF, PersonalFN Research) 

When you review your mutual fund portfolio now, you cannot just exit those schemes that have underperformed a few others in your portfolio. Note that depending on the investment objective of the respective scheme, its asset allocation, investment strategy, and the philosophy at the fund house, the returns would differ from scheme to scheme. You need to take a very realistic and holistic approach while reviewing your mutual fund portfolio.

For instance, in the short run, even the best Large-cap Fund may not outperform an average Small-cap Fund, but that does not make the Small-cap Fund better than the Large-cap Fund. It’s an apple-to-orange comparison. To invest in small-cap funds, you must have a very high-risk appetite and an investment time horizon of over 5-7 years.

Mid-cap Funds and Small-cap Funds, while they may yield greater returns, the risk you are exposed to is also higher. You see, every scheme category plays a different role in your portfolio. Remember this when you search for the best mutual fund schemes for your portfolio next time.

You must be wary of mutual fund schemes from fund houses that lack a process-driven approach and rely excessively on their star fund managers. This is because when their star fund manager leaves the fund house, the respective scheme may underperform.

Similarly, you should be careful of schemes where the fund manager takes on excessive risk, chases momentum, ignores the fundamentals, does not give much emphasis to portfolio diversification, and the fund house lacks robust risk management systems. If the bets of the fund manager go wrong, the respective scheme may underperform.

Additionally, what matters in the evaluation process is the experience of the fund management team. During the bull market phases, even inexperienced fund managers and their teams survive. But the real test is when the market hits a turbulent patch for a fairly long time period (months to years) and/or enters a bear phase. That is what distinguishes the men from the boys and gives an indication of their skillset, conviction, grit, and temperament.

If you hold schemes from mutual fund houses that show the above qualities, then it’s perhaps time to replace them with better alternatives.


The other occasions when you the investor may consider redeeming your mutual funds are:

  • When there is a change in the fundamental attributes of the scheme since you began investing
  • On meeting your financial goals
  • To rebalance the portfolio
  • When you find better alternatives

However, when you decide to cull out equity mutual funds that have underperformed, make sure you have given enough time to the scheme to prove its mettle. (Ideally around 3-5 years for a Large-cap fund, Large & Mid-cap Fund, Multi-cap Fund, Flexi-cap Fund, and ELSS; around 5-7 years for a Mid-cap Fund, Small-cap Fund and Value Fund). Moreover, do this in congruence with your risk profile.

As mentioned earlier, taking a very realistic and holistic approach is necessary to review your mutual fund portfolio. You should not get carried away by the outperformance or frown about the underperformance of mutual funds over the past 1 year. It is quite possible that the outperforming schemes churned their portfolios and underperforming schemes did everything as per their investment mandate and have followed well-defined systems and processes.

A prudently carried out mutual fund portfolio review would help you adduce the following benefits:

  1. Align the investments as per your risk profile, investment objective, envisioned financial goals, and the time in hand to achieve those goals.
  2. Spot schemes that have not aligned their portfolios with their stated investment objectives and are not suitable to you as per your risk appetite.
  3. Identify persistent underperformers and cull them out.
  4. Replace and restructure your portfolio astutely with deserving and suitable alternatives.
  5. Ensure that your portfolio is in line with your present circumstances, the financial goals you intend to plan for, and asset allocation best suited for you.
  6. Facilitate portfolio consolidation and rebalancing.
  7. Ensure optimal structuring and diversification of the portfolio (which is one of the basic tenets of investing).
  8. Improve the return potential of the portfolio.
  9. Preserve wealth while you create it.
  10. Make sure you are on track to accomplish the envisioned financial goals.

I suggest, seeking professional help to comprehensively review your mutual fund portfolio.

If you conduct a comprehensive mutual portfolio review now, it may help you overhaul your portfolio for future uncertainties, plus cash-in the gains that some schemes in your portfolio might have made by chance — thanks to the unprecedented market rally.

When you are approaching equities now at a market high, avoid making these eight grave mistakes…

  1. Skewing your mutual fund portfolio to mid-cap, small-cap, and thematic schemes and disregarding asset allocation
  2. Chasing every IPO that hits the market expecting extraordinary listing gains
  3. Falling for the Rs 10/- proposition and subscribing to every New Fund Offer (NFO)
  4. Picking stocks or equity mutual funds based on their past performance (which is not indicative of future returns)
  5. Acting upon unsolicited investment advice and investing randomly without a financial plan, in stocks and mutual funds
  6. Expecting supernormal returns over the short-term
  7. Discontinuing SIPs in worthy equity mutual fund schemes
  8. Liquidating the safe money you’ve parked in bank fixed deposits to invest in equities
  9. Not holding adequate cash in hand and in the bank

Reviewing your portfolio when the S&P BSE Sensex is nearing the 60,000 level may prove to be in the interest of your long-term financial wellbeing and ensure you are on track to accomplish the envisioned financial goals.

This article first appeared on PersonalFN here

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