Your Portfolio and Its Performance: A Comprehensive Review

Hello, fellow investors! Today, we're diving deep into the core of our investment journey - analyzing the performance of our portfolio and understanding where we stand. Let's go through the key aspects:



Fund Performance vs. the Benchmark
When evaluating the performance of the funds in your portfolio, it's crucial to compare them against their respective benchmarks. For instance, if you have equity funds, they should ideally be measured against indices like Nifty 50 or BSE Sensex. If your large-cap fund returned 12% over the last year while the Nifty 50 returned 10%, you've outperformed the market. However, don't just look at annual returns; over the last five years, if your fund only matched or underperformed the benchmark, it might be time to reconsider your investment.


Fund Rolling Returns vs. the Benchmark
Rolling returns give us a better picture of consistency over time. Instead of looking at just endpoint returns, rolling returns show how your fund has performed over various overlapping periods. A 3-year rolling return analysis might reveal that your mid-cap fund has beaten its benchmark 80% of the time over the last decade, indicating good consistency in performance. This can be particularly insightful for funds where performance can be volatile.


Review of Portfolio Risk: Asset Allocation
Asset allocation is the bedrock of risk management in your portfolio. Let's say your current allocation is 60% equity, 30% debt, and 10% gold. Here, we need to check if this mix aligns with your risk tolerance and investment horizon. If you're nearing your financial goals or have a lower risk appetite, you might want to tilt more towards debt or gold. Remember, the right balance can cushion against market volatility.



Standard Deviation
An important aspect of risk assessment is understanding the volatility of your investments through standard deviation. Standard deviation measures how much the return on an investment deviates from the expected normal or average return. A higher standard deviation means higher volatility, thus potentially higher risk. If your equity fund has a standard deviation of 15% over the past year compared to the market's 10%, this suggests your fund is more volatile than average, which could mean higher potential returns but also higher potential losses. It's vital to compare this with your risk tolerance.


Jensen's Alpha
Jensen's Alpha is a measure of an investment's performance on a risk-adjusted basis. It shows whether a portfolio has earned more or less than its expected return, given its level of risk (beta). If your fund has an alpha of 1%, it means it has outperformed its benchmark by 1% after adjusting for risk. A positive alpha indicates superior performance, while a negative alpha suggests underperformance.


Capture Ratio: Up and Down Side
Capture ratios measure how well a fund performs relative to its benchmark during specific market conditions.

Upside Capture Ratio: Measures how much of the market's gains your fund captures. A ratio over 100 indicates your fund is outperforming the benchmark during rising markets. For example, an upside capture of 110 means your fund gained 110% of what the benchmark did during up periods.
Downside Capture Ratio: Shows how much of the market's losses your fund suffers. A ratio below 100 means your fund is losing less than the benchmark during down markets. An 80 downside capture ratio suggests your fund lost only 80% of the benchmark's decline.
Ideal Scenario: You want a high upside capture ratio and a low downside capture ratio, indicating your fund does better than the market when it's going up and better than the market when it's going down.


Sharpe Ratio
The Sharpe Ratio helps investors understand the return of an investment compared to its risk. A higher Sharpe ratio indicates better risk-adjusted performance. For example, a Sharpe Ratio of 1.2 means for each unit of risk, you're getting 1.2 units of return, which is considered good. Compare this with other investments to see which provides better compensation for the risk taken.



Review if Your Mutual Fund Portfolio is Over-Diversified
Diversification is good, but over-diversification can dilute returns and make portfolio management cumbersome. Holding too many funds, like 20 different ones, can spread you too thin. Here, the issue of overlapping comes into play. Many funds might have similar holdings, particularly in popular stocks or sectors, which means you're not diversifying your risk as effectively as you might think. This overlap can lead to a concentration of risk rather than spreading it. Ideally, your portfolio should include a focused selection, perhaps no more than 5-10 funds, each serving a distinct purpose in your strategy, ensuring minimal overlap and true diversification.


Tax Planning
Tax efficiency is as crucial as investment returns. Utilize the benefits of tax-saving instruments like ELSS funds which offer deductions under Section 80C. Also, consider the holding period for capital gains - short-term vs. long-term can significantly impact your tax liability. For equity funds, holding for more than a year reduces tax from 20% to 12.5%. Debt funds have different rules, so align your exit strategy accordingly.


Continue SIP and Step SIP
Systematic Investment Plans (SIPs) and Step-up SIPs are fantastic tools for disciplined investing. SIPs allow you to invest a fixed amount regularly, which helps in rupee cost averaging. It's beneficial during volatile markets as you buy more units when prices are low. Step SIPs involve increasing your investment amount annually, combating inflation and accelerating wealth accumulation as your income grows.


Conclusion
In wrapping up, remember, the journey of investment is about constant learning and adjustment. Regularly reviewing your portfolio's performance against benchmarks, understanding the risk through asset allocation, keeping an eye on diversification and avoiding overlapping investments, and being tax-savvy will lead you towards your financial goals. Keep investing through SIPs, and consider stepping up your investments as your financial situation allows. Here's to making informed choices and watching your wealth grow!

Stay tuned for more insights, and happy investing!