WhiteOak Capital explains how to assess mutual fund portfolios beyond returns

Investors reviewing their mutual fund portfolios amid equity market volatility should look beyond short-term returns and assess consistency across market cycles, downside protection and whether their investments remain aligned with their financial goals, according to Ranjit Bhatia, Head of Manager Research, Investment Risk and Product Strategy at WhiteOak Capital.

Bhatia said strong performance in individual market segments can also alter a portfolio’s risk profile, making periodic reviews of asset allocation important.

He outlined key considerations for investors assessing mutual funds, choosing between active and passive strategies, and evaluating Fund of Funds (FoFs).

Key points for investors

Look beyond short-term fund performance

Investors should assess whether a fund has delivered consistent performance across market cycles rather than relying on its position in recent return rankings. Its behaviour during market corrections and its alignment with the investor’s financial goals and risk appetite are also important considerations, Bhatia said.

He said investors who react to every bout of market volatility risk making decisions that may undermine their long-term investment outcomes.

Review asset allocation after strong market gains

Strong performance in a particular segment, such as small-cap stocks or a specific sector, can increase its share in a portfolio and expose investors to more risk than they originally intended.

Bhatia said investors should periodically compare their actual portfolio allocation with their intended allocation and rebalance where necessary. This may involve trimming exposure to assets that have gained substantially and increasing allocations to those that have underperformed.

Changing interest-rate expectations are another factor to consider when assessing the relative role of equity and debt in a portfolio, he said.

Assess the investment process when choosing active funds

Expense ratios and past performance alone may not provide a complete basis for choosing between active and passive funds, according to Bhatia.

For active funds, investors should examine whether outperformance stems from a clearly defined and repeatable investment process. They should also be prepared for periods when the fund underperforms its benchmark or peers.

Passive funds seek to track a benchmark, subject to expenses and tracking differences. The choice between the two approaches should therefore take into account the investment segment, the potential role of active management and the investor’s ability to remain invested through periods of underperformance.

Check costs and portfolio overlap in a Fund of Funds

A Fund of Funds invests in other funds rather than directly investing in individual securities. Before investing, Bhatia said, investors should assess how the underlying funds are selected, the total cost of the structure, portfolio overlap and the FoF manager’s track record.

Investors should consider both the FoF’s expense ratio and the expenses of its underlying funds when evaluating the total cost.

Overlap between underlying funds also warrants attention. If several funds hold similar securities or follow comparable investment styles, the diversification benefit of combining them may be limited.

Evaluate how the FoF is managed

Investors should examine the process used to select, monitor and combine underlying funds, rather than relying only on their past returns, Bhatia said.

Such a structure may be relevant for investors who prefer not to select and monitor multiple funds themselves. However, the product’s costs, investment approach and suitability for their financial goals remain important considerations.