Mutual fund advisors say rebalancing periodically ensures the portfolio remains aligned with the investor’s risk appetite and long-term goals. Regular evaluation, at least annually, keeps the portfolio on track and ensures a well-balanced mix across categories.
“This disciplined approach reduces the temptation to over-allocate towards recently high-performing categories, thereby preventing unnecessary risks from creeping in. Investors should also assess overlaps in holdings within the same category, as too many funds in one space can dilute returns and increase redundancy,” said Sagar Shinde, VP Research, Fisdom.
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Out of 459 equity schemes that have been there in the market since last Diwali, the toppers have offered up to 74% return. The benchmark indices – Nifty 50 and BSE Sensex – have gained around 26.91% and 24.35% respectively since the last Diwali. Out of these 459 equity schemes, around 30 schemes have offered less returns when compared to BSE Sensex (below 24.35% return).Mutual fund investors often invest in the schemes after looking at the recent stellar performance and miss out the underperformance if any. But the important thing to know is what to do with the schemes that are underperforming for a very long period.
The expert recommends that if the scheme continues to underperform for one or two years without any external factor impacting the performance, then an investor should make an exit from such a scheme and reinvest in more promising schemes.
“If a mutual fund scheme has been underperforming for an extended period, it’s essential for investors to conduct a thorough evaluation. Start by comparing the fund’s performance with relevant benchmarks and peer funds in the same category. If the underperformance persists for one to two years, and no external factors (like broader market downturns) explain the lag, it may be time to exit and reinvest in more promising funds,” recommended Shinde.
“Holding onto such underperformers due to inertia or the hope of recovery can negatively impact the portfolio’s overall returns. It’s more beneficial to replace these schemes with ones that better align with your financial objectives and risk appetite,” he added.
On the other hand, if the underperformance of the fund is due to temporary market factors and the fund’s strategy aligns with the long-term goals, the expert recommends staying invested in such schemes.
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“If the underperformance is due to temporary market factors and the fund’s strategy aligns with long-term goals, staying invested might still be worthwhile. A strategic approach is to redeem in tranches, minimizing the impact of exit loads and mitigating market timing risks. This allows investors to gradually rebalance the portfolio while capitalizing on any potential recovery in the meantime,” said Shinde.
According to the September monthly data released by the Association of Mutual Funds in India (AMFI), 27 mutual fund NFOs were launched which together collected Rs 14,575 crore with the highest contribution from sectoral/thematic funds at Rs 7,842 crore.
Investors often invest in NFOs without aligning them with their risk appetite and goals as the investment can be made at Rs 10. If you have invested in NFOs that are not aligned with your goals or risk appetite, you should take a structured approach which includes evaluating the role of the fund in the overall portfolio and then proceeding accordingly is what the expert recommends.
“If investors find that NFOs in their portfolio do not align with their risk appetite or long-term goals, they should take a structured approach. First, evaluate the performance and role of these NFOs in the overall portfolio. If the fund does not provide meaningful diversification or introduces unnecessary risks, it is advisable to exit and reallocate to more suitable funds,” recommended Shinde.
“NFOs launched with thematic or sectoral focus often carry higher volatility and are sensitive to market cycles. In such cases, it is reasonable to wait for the cycle to play out, provided the investor is comfortable with the risks,” he added.
Note, that sectoral or thematic funds are not recommended to new or inexperienced investors. These schemes are extremely risky and volatile and their fortunes depend entirely on the prospects of the sector or theme. Every sector or theme goes up or down in certain phases in the economy.
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Three diversified equity fund NFOs (multi cap, large & mid cap, and dividend yield fund) together collected Rs 2,031 crore in September. If these diversified fund NFOs are not aligned with your risk appetite and goals, you should follow the same approach and exit if necessary as holding such funds dilute the returns over time.
“If the NFO is a more traditional, diversified fund (e.g., large-cap or flexi-cap) and has underperformed consistently, follow the same rules applied to regular underperforming schemes: compare with category peers, evaluate if the fund aligns with your strategy, and exit if necessary,” said Shinde.
According to the expert, one should avoid investing in NFOs based on marketing or other factors. Instead should try to align them with the financial goals and risk profile.
“For future investments, it is important to avoid investing in NFOs based on novelty or marketing buzz. Instead, focus on alignment with financial goals and risk profile. Diversification should be meaningful, not excessive, ensuring each fund contributes towards the portfolio’s growth without adding unnecessary complexity,” advised Shinde.
DIY investors often go overweight on some categories and the portfolio is not aligned with the desired asset allocation strategy. Going overweight on any particular category increases the concentration risk and the vulnerability to market cycles.
The expert recommends that after carefully evaluating the overall portfolio if you are overweight in any particular mutual fund category then you should trim the excess exposure and rebalance the portfolio with the desired asset allocation strategy.
“If a portfolio is overweight in a specific category—such as large-cap, mid-cap, or sectoral funds—it introduces concentration risk, which can affect overall returns and increase vulnerability to market cycles. To address this, investors should trim excess exposure and rebalance the portfolio to align with their desired asset allocation strategy,” advises Shinde.
“A key consideration is that every category—whether large-cap, mid-cap, small-cap, or sectoral—goes through phases of outperformance and underperformance over time. For example, large-caps may provide stability in turbulent markets, while mid- and small-caps can outperform during bull phases. Thus, sticking to a pre-defined asset allocation helps maintain portfolio integrity and mitigates the risks of chasing short-term performance trends,” he added.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times).
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