Skip to main content

How to gauge the risk profile of your mutual fund portfolio?

MUTUAL funds are considered to be an investment option for those who do not generally devote a lot of time to monitoring and managing their portfolios.

Investors experience both good as well as tough times as far as mutual fund investments are concerned.

But while evaluating the portfolio of their equity mutual fund holdings there are a few points that one should check to know about the level of risk that they are facing. Often there are situations where there is a higher risk than what was estimated initially.

Here are a few ways to evaluate various risk levels.

Individual holding exposure:

The portfolio of the equity fund where one has invested or plans to invest needs to be scrutinised to see whether the risk levels are such that could lead to a larger volatility in the holdings. Depending upon this factor and the risk taking ability of the investor the choice about a particular fund as an investment should be made.

One key point to watch out is whether there is a large exposure to just a few stocks. In a diversified equity fund there is a limit of 10 per cent for exposure to a single stock.

But if there are four to five stocks where the exposure is high, or around 9-10 per cent, then it could be that these holdings determine the performance of the fund. Several investors might not find such a situation suitable for their needs, while others who want some concentration for an outperformance would welcome such a mix.

Sector exposure:

There also has to be a limited exposure to a particular sector in the portfolio. There is a tendency among fund managers to increase a fund's exposure to a few particular areas when they are doing well. This can be a dangerous as it could lead to a situation where the movement of an entire fund is being dictated by a particular sector. Usually, MFs have internal limits.

For example, some limit a fund's exposure to a single sector to not more than 20-25 per cent and so on.

Another risk is where the exposure is spread across more than one sector, but are often linked in terms of performance. For example, automobiles, tyres and auto ancillary sectors are linked, so a deterioration or improvement in the condition of any one will impact all the other related sectors.

This can have a big impact on the portfolio as a whole. Another example is the construction field that would include real estate, cement and steel sectors among others.

Market cap exposure:

The re is often a market-cap driven trend in the equity markets. This would mean a situation where there is a rally in large-cap stocks or where the conditions are weak for mid-cap IT stocks and so on. Often the portfolio might seem to be diversified as there is no concentration on a specific company or sector, but there is another form of risk that is present there.

If majority of the holdings belong to a certain market-cap then a similar risk situation can arise. The investor can find that there is just a one-way movement on several occasions in the portfolio. A fund with a specific market-cap investment mandate, like a mid-cap scheme, will be forced to invest in holdings with a particular marketcap. But in case of diversified equity funds, too, the situation needs to be checked to see the extent of risk in this area.

Group exposure:

There are a lot of ways in which the holdings in various companies can be classified.

The situation could be such that while the holdings are diversified across sectors and also across market-cap, there is a slightly higher exposure to companies from a single business group. This kind of exposure, too, can create a higher amount of risk especially when the performance of group companies on the stock market follows a similar trend.

While having more than one company in the portfolio of a group is not a negative factor, having too much of a weight could lead to a situation where the fund's performance will be magnified either on the upside or the downside whenever a trend like this is witnessed.

 

Popular posts from this blog

Debt Mutual Fund Dividends are Taxable

DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free . It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT.   The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R 100, it used to make a provision for R 128.3, paying R 28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per ce...

Franklin India High Growth Companies Fund

Franklin India High Growth Companies Fund Online One of the key developments that the Street is keenly waiting for is a cut in interest rates by Reserve Bank of India . With demand rising gradually, a rate cut is expected to boost earnings growth for companies. In such a situation, schemes which invest in high growth companies are best suited, especially when seen from a long-term perspective. One such scheme is Franklin India High Growth Companies Fund. Fund managers Anand Radhakrishnan, Roshi Jain and Srikesh Nair strictly follow valuation parameters when it comes to choosing stocks.Valuation parameters, such as enterprise value, price-to-earnings growth ratio, forward price-to-sales ratio and discounted earnings per share, play a critical role in selecting companies for investments. Taking into account these parameters, the fund managers invest in companies which are poised for high growth in their respective sectors. This approach has been in favour of the scheme and it has perform...

Avoid NFOs

  Don't get taken in by the flurry of new fund offers. You will be better off sticking to the tried and tested schemes.   For the past one year, to cash in on the bull run in equities, mutual fund houses have gone on a new fund offer (NFO) overdrive. But experts are unanimous in their advice: avoid NFOs . While past performance is not an indicator of how a fund will fare in the future, it does tell the investor how skilful the fund manager is. This crucial information is missing in an NFO. Not only is there no track record to judge an NFO by, many NFOs are similar to funds that already exist. If the new fund is similar to existing funds, you are better off investing in the latter. Around 67% of the new launches in 2014 were closed-end products. Investing in the NFO of a closed-end fund is doubly risky. In case the fund's performance is lacklustre, a closed-end fund does not allow you to exit. Even though closed-end funds are listed on the stock...

Mutual Fund Exit Load Changes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now