When should one change the mutual fund portfolio?

Once the mutual fund portfolio is designed, it requires maintenance for obtaining a balance in returns or for an effort to increasing them. Well, are these the only reasons to consider required changes in a portfolio? No, there are other reasons too. Simply putting it, whether we consider stocks or bonds, they do not perform in a similar fashion over a period of time. There is always a combination of lows and highs. Hence there is always a risk associated and to mitigate the risk, mutual funds require constructive changes in their portfolio.

Now, how frequently such changes are required is the question. Changes are done when there is a significant change in return requirement, investment requirement, fund underperformance, or investment time-horizon, fund objectives or risk tolerance of an investor.

Let us consider different situations where a change is required and what impact it will have on the portfolio:

1. Change in return objective: asset allocation will change in the portfolio. There can be an addition of new fund or revision in the allocation percentage of an existing fund.
2. Change in investment time horizon: This will impact changes in asset allocation percentages.
3. Change in risk tolerance: This will bring fund replacement in existing portfolio.
4. Under-performing funds: This can be a result of uncertain market conditions or errors in fund management. The exact cause needs to be identified before implementing any changes in the portfolio. Each fund category should be reviewed carefully and a comparison should be made to industry or category benchmark or average returns.
5. Removal of inappropriate fund: These funds might not be meeting the return or investment objectives of investors, their allocation percentage might be higher as compared to other relevant funds or they might carry higher or lower risk which is not in accordance with the customer requirement specification.

These are the major situations which ask for a requirement in changes to mutual fund portfolio. Apart from these, if investors want to consider inclusion of new funds in portfolio, then they should seek advice from fund and portfolio advisors.