How often should a mutual fund portfolio be reviewed for re-jigging or rationalisation?
For your rebalancing needs, you can perhaps take a look at your portfolio once a year or whenever the asset allocation deviates from the original asset allocation by more than five per cent. That is when you can do the re-jigging or rationalisation to restore the initial share that you had started with.
For ongoing tracking and monitoring of the portfolio, I would say that it is not a bad idea to take stock of your funds at least once a year and look at how things are progressing. But it is essential to note that any decision to exit a fund for performance reasons should still not be based only on the last year's performance. The long-term performance of your funds should still guide you, or else you will simply end up playing musical chairs with your funds.
Having said that, when it comes to debt funds, it would be worthwhile to keep an eye on certain parameters. These are the parameters that you should check every two-three months to make sure things are on track. For instance, if you notice AUM of the fund falling rapidly and a corresponding rise in the level of borrowings, it could be a sign of trouble brewing. That could signal that the fund cannot liquidate its portfolio to the magnitude to meet the redemption requests, and that's why it had to resort to borrowings, which in times to come can go out of control.
Likewise, suppose you see a fall in the AUM accompanied by a rapid rise in exposure to a particular issuer. That too could mean perhaps those bonds are stuck, and the fund cannot liquidate them even as it liquidates other portions of the portfolio to honour the redemption request. As the proportion of these issuers rises in the portfolio and eventually if their bonds do need to be downgraded, it can inflict a high degree of loss or a value erosion on the remaining investors. Some of these instances have happened in the recent past.
That is why on these parameters, you should keep an eye on your debt funds more often. Also, keep an eye on the overall credit quality and the break-up of the fund's portfolio. This will help you make sure that the fund is not taking an undue risk or increased exposure to lower-rated bonds, thus making it riskier than what you had signed up for. If you see those trends, it might be a time to look for other alternatives. You can get a lot of this information on the fund pages of Value Research website.