When to Do Mutual Fund Reviews

If you think mutual-fund investments are managed by professionals, and you can just sit back, twiddle your thumbs and let them handle your investment, you could be wrong.

It is important to involve actively in managing and monitoring your investment in a regular basis. Read the investment documents such as prospectuses, fund fact sheets, and interim and annual reports. They may assist you in identifying potential signs that can affect your investment, especially during market uncertainties. If you know your mutual funds well, you are then able to identify the changes. You need to understand these changes before deciding on the next action.

There are six signs which indicate you should do your portfolio reviews:
 

Uncorrelated Movement of NAV Per Unit against Its Benchmark


The mutual fund's price movement or its net asset value (NAV) per unit is the easiest thing to look at. You can review the price movement in relation to market movements.

This comes with the assumption that the fund is open-ended and its securities are valued on a daily basis. For example, when the market is up but the NAV per unit falls or remains unchanged (and vice versa), it can potentially be a bad signal and you should question why the correlation is as such. It can indicate that the fund manager made a wrong stock pick and thus the fund didn't perform although the market performed.

However, it doesn't mean that you have to track the pricing constantly on a daily basis. But, if you are a dedicated investor, you can check it on a weekly basis.

Analyzing the magnitude of the change in NAV is another way of tracking. The NAV should not be changing drastically in a week in normal market conditions. If it does, you should call up the fund house to check the reasons for the drastic change.

However, you should also look beyond at the price movement. The managers' commentaries in the fact sheets and the daily comments in the newspapers will give you a better idea of the fund performance against the benchmark. It is not uncommon to find funds underperforming in the short term. Thus, you have to determine whether the change is short or long term based on your own macro outlook.

An ideal way is to look at the performance based on a three to five-year term because fund managers have different time horizons and cannot beat the benchmarks in the short term.
 

Changes in the Fund Size


If there is a major redemption going on, then you need to find out why it is so and how the manager is managing this change.

The fund size of the must be huge enough for the managers to diversify the investment, especially for bond funds. If the bond fund size is too small and there is a default in one of its bond holdings, the performance can be significantly affected.

Hence, you have to evaluate if the bond fund you are holding is sufficiently big. Take a look at those that have been around for a long time. Then, look at the biggest and smallest bond fund sizes to get a feel of how the average bond size should be.

On the other hand, if there is an increase in fund size, you may want to find out if the manager is able to get good investments for the overall portfolio.
 

High or Low Cash Level


Prolonged cash holding is not doing any good to the mutual fund investors. When the manager is holding a huge amount of cash in the portfolio, it shows that they are doing nothing, while you keep paying the annual management fee.

When you buy into an equity fund, you expect it to be largely invested in equities. The manager should not be holding too much cash. If it happens, you can consider redeeming your investment.

Low cash position, on the other hand can be a hindrance to fund performance. If it holds too little cash and redemption is high, it then forces the manager to sell off some of the holdings, which can affect the performance of the overall portfolio.

Healthy cash level holdings are normally between five to 10 percent. Ideally, fund managers should not hold more than 15 percent in cash, regardless of fund type.
 

Change in Investment Mandates


You have to take note when the fund house proposes changes to investment mandates. Changing the investment mandate is purposed to increase the fund's commercial appeal and get more investment. In this case, it shows that the fund house may not be good enough in managing the fund.

The managers cannot simply change the investment mandates without investors’ approval. If you do not agree to the new investment mandate because it does not suit your investment objective, then consider redeeming your investment.
 

High or Low Turnover Ratio


A high turnover ratio indicates that the managers are trading the funds' underlying assets actively. If the ratio is high and the manager still cannot beat the benchmark, it can be at the expense of the fund. A turnover ratio that is too low can also mean that the managers are sitting there and doing nothing with your investment portfolio, which is not good to you.

Healthy turnover ratios are usually less than 100% in normal market circumstances. If the turnover ratio is high in normal markets, it might signify that the manager wants to switch some of his top holdings. Then, you have to keep an eye on the fund's facts sheet to see what is happening.
 

Change in Fund Manager


Such changes can affect your fund performance if the star-manager approach is used. It can be potentially dangerous for the fund if there is no proper successor.

If the replacement has a different management style, it can also affect the fund performance. Collision of investment styles may happen. When the two investment styles collide, it can be potentially disastrous. If you do not have confidence in the new manager, you should make a switch.

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