Assessing your mutual fund portfolio is an important part of managing your investments. It is important to keep tabs that your investments are aligned with your plans and make sure that you are getting the most out of them. Knowing how to assess a mutual fund portfolio or any investment can help you understand your investments better. By understanding the different components of a mutual fund portfolio, we can be aware of our investment positions.

Assessing your mutual fund portfolio is an important part of managing your investments. It is important to keep tabs that your investments are aligned with your plans and make sure that you are getting the most out of them. Knowing how to assess a mutual fund portfolio or any investment can help you understand your investments better. By understanding the different components of a mutual fund portfolio, we can be aware of our investment positions.

1.       Being informed about the global and domestic economic situation:

It can be worrying to track your portfolio without having knowledge of the country’s economic situation. The Pandemic downturn and its revival, showed us quite clearly how crucial national and global events are to our market investments. This year in 2023, with a global recession taking place is reflected in the growth of most of the investments in equity.

2.       Benchmark and broader market:

The market reacts to these important events and depending on the news we may see changes or trends in our portfolios. Recession slows down growth in every sector which means benchmarks such as Nifty, Sensex, and Dow Jones will record a downward growth in their share prices. There are events that affect one or two related sectors only, for example, due to high attrition rate of tech employees and the global recession, the IT sector has been underperforming since the past year.

3.       CAGR, XIRR, and absolute returns:

To assess your funds or portfolio performance, we have terms like CAGR, XIRR, and absolute returns. These measure and reflect the historical performance of an asset; the greater its value better is their performance.

CAGR (Compounded Annual Growth Rate) is the average annual growth rate at the asset is increasing or declining in a given number of years. This measure is more appropriate for one-time investments.

CAGR = (Final Investment Value/Initial Investment Value)^1/n – 1

For calculating SIPs returns, we consider looking at the XIRR (Extended Internal Rate of Return). XIRR accounts for every new installment by calculating the compounded growth of each installment and adding them together to give the net returns of the investment.

The calculation of XIRR is a bit complicated as there is a different amount invested and each installment is invested for a different duration. XIRR accounts for every single cash flow within the investment.

Absolute Returns, the simplest to understand, are the ultimate gain or loss you have made in the investment. Also known as Total Returns, it is the change in the initial and final value of the investment. You can rely on these terms to assess how well your portfolio has been performing and accordingly seek advice and take action.

4.       NAV:

The Net Asset Value of a mutual fund is the market value of one unit at a given date. A mutual fund existing for a longer time will have a greater NAV, hence it is not important for a mutual fund to have a lower or higher NAV in order to start investing in it. However, a lower NAV means a larger number of units will be allotted to you for the same amount. NAV of direct plans is a little higher than regular plans.

5.       How often should you review your portfolio:

Reviewing a portfolio should take place once a year, it is not advised to keep regularly checking your gains or losses. The above aspects and market conditions will decide whether you should churn your portfolio at a specific time.

6.       Overall and fund-to-fund analysis:

A portfolio needs to be optimally diversified within mutual fund classes as well. You or your advisor will determine particular thresholds for sectors and scheme objectives aligned with your requirements. Large cap or small cap, growth or value, these characteristics represent the objective of a fund. Further, the fund manager may have exposure or specialization in certain specific sectors, to manage your portfolio you need to limit exposure to sectors and objectives.

We can analyze the sector allocation of a particular fund in comparison with the benchmark and by the fund managers approach to driving performance (It is either based on asset allocation or stock picking.) we assess whether the fund fits in the diversified portfolio and aligns with the investors needs.

Financial literacy for everyone is as important as skill building and career growth. It is every wealth managers duty to ensure that clients are well informed about their investments with complete transparency.