Diwali Special: How to review your mutual fund holdings & improve portfolio efficiency

Diwali is an opportunity for investors to review their mutual fund portfolios, identify overlapping or underperforming schemes and check whether their investments align with their financial goals and risk appetite. However, portfolio clean-up does not mean exiting every laggard.

Investors should assess whether underperformance stems from temporary market conditions or a sustained decline in the fund’s investment process by examining its performance against benchmarks and peers over multiple periods.

Shivam Pathak, CFP and Founder of Asset Elixir told ETMutualFunds that if a fund consistently underperforms its benchmark and peers over 1-2 years, investors should review the reasons and if the underperformance reflects persistent issues rather than a temporary market cycle, it may be better to consider a more consistent alternative.


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Hrishikesh Palve, Director, Anand Rathi Wealth Limited shared with ETMutualFunds that investors should first identify the reason behind a fund’s underperformance before deciding to exit like underperformance due to a broader market correction, a change in category leadership, fund’s investment style going out of favour, or a change in the fund management team or investment strategy.

“However, if a fund consistently underperforms its benchmark and peers over multiple years, it requires a closer review. Investors should assess whether the underperformance is temporary or a sustained deterioration in the fund’s investment process.”

Palve further said that if the fund continues to lag its benchmark and peers despite favourable market conditions for its category, investors should consider switching to a better-performing scheme with a consistent track record and the decision should be based on sustained performance rather than short-term returns.

NFO investments: Do they align with your goals and risk appetite?

New fund offers (NFOs) often attract investors with the promise of a new investment strategy or exposure to a particular sector, theme or market-cap segment. Some investors may also perceive a new scheme priced at Rs 10 per unit as cheaper than an existing mutual fund with a higher net asset value (NAV) without aligning them with their risk appetite and goals as the investment can be made at Rs 10.

However, the initial NAV does not determine whether a fund is attractively valued or likely to deliver better returns. Investing in multiple schemes with similar holdings can also increase portfolio overlap without providing meaningful diversification. Investors who have bought NFOs without evaluating their suitability should review whether these schemes serve a genuine purpose in their portfolios.

Palve said before investing in an NFO, investors should assess whether it fills a genuine gap in their portfolio or duplicates existing exposure. A Rs 10 NAV does not make a fund cheaper or more attractive, as NAV reflects unit value, not valuation or future return potential.

He further said that for investors who have already invested in an NFO without evaluating these factors, they can consider assessing the scheme’s underlying holdings, investment strategy, risk level and role in the portfolio. “If the investment has resulted in significant overlap, excessive exposure to a particular sector, theme or market-cap segment, or does not align with risk profile, then one can consider gradually reallocating the money to existing investments that better fit their overall portfolio allocation.”

Pathak said investors should check whether the fund fits their financial goals and existing portfolio. If it adds unnecessary risk or duplicates existing investments, they should consider exiting and reallocating the money to a more suitable fund, after accounting for taxes and exit loads.

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Portfolio overweight: How should investors rebalance?

While cleaning up the portfolio investors make several mistakes such as making redemptions from the investments offering good returns, without analysing the pros and cons of early redemption and exit from an underperforming fund. Market movements can cause an investor’s portfolio allocation to drift away from its intended mix.

DIY investors often go overweight on some categories and the portfolio is not aligned with the desired asset allocation strategy and going overweight on any particular category increases the concentration risk and the vulnerability to market cycles.

Pathak said investors should avoid adding more money to a category that already has a high allocation. Fresh investments can be directed towards underrepresented categories, while selective rebalancing can help bring the portfolio back in line with the investor's risk profile.

Palve said investors with an overweight allocation should avoid further investments in that category and direct fresh SIPs or lump-sum investments towards underweight categories. For example, an investor whose portfolio has become heavily weighted towards small-cap funds because of past investments or strong performance could direct new investments towards large-cap funds or other underrepresented categories until the allocation moves closer to the desired level.

If the overweight is substantial and results in excessive concentration, investors can consider partial redemptions and reallocation, while accounting for the tax implications and applicable exit loads, he further said.

Booked losses: Hold on for a recovery or reassess the fund?

A decline in a fund’s NAV can make investors reluctant to exit, particularly when they hope to recover their original investment amount. However, the purchase price alone should not determine whether a scheme deserves a place in the portfolio.

Investors need to assess whether the fund’s investment rationale remains intact, whether its portfolio quality has weakened and whether its performance is consistent with its strategy. A temporary market correction may not justify an exit, but persistent underperformance or a deterioration in the investment process warrants closer scrutiny.

Palve said investors should not continue holding a scheme merely because they have incurred a loss or are waiting for the NAV to return to their purchase price. Instead, they should evaluate the fund’s underlying fundamentals, investment strategy, portfolio quality, performance consistency and suitability for their risk profile.

A fall in NAV alone is not necessarily a reason to exit if the broader market or the fund’s category is experiencing a temporary downturn and the investment rationale remains intact. However, if the scheme has consistently underperformed its benchmark and peers, its investment strategy has weakened or it no longer fits the investor’s portfolio, the decision should be reassessed regardless of the loss, he further said.

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Pathak said investors should not hold a fund simply in the hope of recovering their losses, the decision should depend on the fund's current fundamentals, consistency and future prospects and if the original investment rationale no longer holds, it is better to reassess and consider more suitable alternatives rather than wait indefinitely.

(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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