A primary reason as to why you should regularly monitor your investment portfolio is that you're able to figure out the bad investments you've made and get rid of them. Another reason is to make way for new investments that'll boost your portfolio, but we'll get to that later. When the equity markets are down for a prolonged period of time, one can easily see the bad returns and say that their equity investments are not doing well. However, figuring out what's actually good and bad is a little more complex than that.
In such times of a market downfall the fund managers are the ones who have to undergo tremendous performance pressure as even a reasonably good performance of theirs can be misidentified as bad during such times. We need to consider in what sense a fund has performed poorly. There are three or four ways in which a fund can perform poorly and one should be able to distinguish between those in order to make a more accurate judgement of things. One way of assessing a fund's performance is by looking at the absolute returns it has made. Clearly, an equity fund that has given returns of 5 per cent per annum over the last five years hasn't even been able to keep up with a bank deposit. Thus,an easy conclusion to make would be that it has done badly. However, that may or may not be true.
While a fund may be disappointing in terms of its absolute returns, there are other questions that hold more significance. For instance, how has the fund performed in comparison to its peers? Are its returns more or less than the category average?
You can easily get these questions answered if you track your portfolio on the Value Research website. Our platform helps you compare your fund's performance with its benchmark index with ease as well.
Apart from the metrics mentioned above, there are plenty more that can help you understand the performance of the funds in your portfolio. However, all this information can soon become a little overbearing and complex if you are not used to doing this kind of research. What if we tell you there is one single measure that encompasses all of these attributes and helps you make an objective assessment about your fund's performance?
Well, we are talking about the Star Rating that Value Research assigns to every fund (updated monthly).The Star Rating tells you how a fund has performed on a risk-adjusted basis relative to a relevant category in the past. This way, it balances both - risk and return.
As a general rule of thumb, one should only be invested in five-star and four-star rated equity funds. If a fund's rating drops one point, treat that as a warning; and if it drops two points, then you need to analyse why it did so. If the reasons are long term, such as a fund manager change or severe underperformance, then you may pull out of that fund and invest your money into a five-star fund of the same type. However, of course, ideally you shouldn't sell the investments that have been held for less than one year for tax purposes. But that shouldn't be a worry for you - funds rarely see their ratings change so quickly.
And while investing in debt funds, you should prioritise capital preservation over return generation. Although you do want higher returns than bank deposits, you should also be careful to balance the corresponding risk. There are broadly three important risks you need to consider prior to investing in debt funds - interest rate risk, credit risk and liquidity risk. You can read our detailed guide for tackling each of these risks in our free eBook - "The science of investing in debt funds". Also, the new risk-o-meter has become more meaningful now with SEBI's new and completely overhauled risk-o-meter guidelines that have come into effect since January this year. With an upgraded methodology that fixes the issues in the older risk-o-meter, it captures all possible dimensions from which risks can emanate in a debt fund, helping you make an informed decision.
The bottom line here is that you need to look at a more comprehensive picture when you monitor your portfolio. For equity funds that aren't doing well, instead of the bare returns, a composite measure like the Value Research Star Rating could be looked at. For a debt fund, one needs to be mindful of the various risks involved. Subscribers of Value Research Premium need not worry as we are always on top of it and provide you with the best personalised recommendations.