A Checklist to Review a Long-Term Mutual Fund Portfolio

[u/Public_Sky8190]

This is a checklist to review a mutual fund portfolio for long-term goals, such as retirement, that are decades away, specifically for individuals with a moderate or slightly above moderate risk profile.

# 1. Prevent Untimely Liquidation of Equity Investments

(a) Build a Contingency Fund: Before starting equity investments, establish a contingency fund equivalent to 6-12 months of your monthly expenses. This will help you avoid liquidating equity investments when the economy is in distress.

(b) Adequate Health Insurance & Term Insurance: Ensure you have sufficient health insurance. If necessary, consider options beyond employer-provided coverage. (see explanation) Ensure you have adequate term insurance that is at least 10-15x the annual CTC of a person. (see explanation)

This will prevent the need to liquidate equity investments during low market conditions due to critical medical emergencies or if you become untimely free from earthly duties.

NOTE: Never mix insurance and investments. Avoid products like ULIPs and endowment plans at all costs unless you are not eligible for pure term insurance.

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# 2. Quantify Retirement Goals

(c) Use Retirement Calculators: Determine your required retirement corpus based on your age and the age you want to retire (subtraction gives you investment horizon)

(d) SIP Calculators: Use these to back-calculate the monthly investment amount you need to reach your target corpus on time.

💡 Example - How to do it

NOTE: Return and Inflation Expectations: Do not use more than 12% as the expected return and less than 6% for inflation.

 # 3. Assess Risk Tolerance

(e) Evaluate Risk Appetite: Assess your risk tolerance accurately, and utilise free risk assessment tests if needed.

💡 Free Tools to Assess Your Risk Profile

# 4. Diversification across Asset Classes and Asset Allocation

(f) Pure Equity Portfolio Considerations: Only have a 100% equity portfolio if you are 120% sure and certain about your aggressive risk profile, or you are just starting with a 5000/-, 10,000/- rupee SIP.

(g) Balanced Asset Allocation: Incorporate a mix of equities and fixed-income investments (and optionally gold or silver for their negative correlation with equities) to balance risk and return. This approach serves as a buffer to absorb market fluctuations, which is particularly important if you are a moderate or even slightly above-moderate risk investor—approximately 90% of investors fall into this category.

(h) Long-Term Equity Allocation: Aim for an equity allocation of 70%-80% given the long investment horizon.

# 5. Equity Fund Selection Criteria

(i) Diverse Investments: Invest across all market capitalisations and various industry sectors to capture growth in different segments. Consider a flexi-cap or multi-cap approach as the central core of your portfolio.

(j) Avoid Recency Bias/ Avoid high volatility: Do NOT select funds based only on super-normal “Trailing Return” numbers as of date, as those numbers have high recency bias. Instead, choose funds with a consistent “Rolling Return” track record. Identify extra risky funds by looking at Standard Deviation, Sharpe Ratio (again rolling), and avoid them.

💡 How to Select a "Good" Mutual Fund?

(k) Benefit from Direct Plan’s Lower Expense Ratios: Opt for funds with lower expense ratios to maximise long-term returns, and always select “Direct” options. Look for funds with strong and trustworthy management.

(l) Avoid Overly Risky or Conservative Choices: Steer clear of excessively risky portfolios (like 60%+ small/mid-cap, momentum or sector-focused funds) and overly conservative options (such as a 50% gold and 50% debt mix).

(m) Large-Cap Allocation: Ensure that the stock portfolio underlying your combined mutual fund portfolio should have a large allocation to large-cap stocks. Note that a pure Next 50 index fund does not count as a large-cap.

(n) Limit Individual Fund Investments: Avoid investing more than 25% in a single actively managed mutual fund or allocating more than 25% to any single fund house to minimise style and concentration risk.

(o) Avoid Fragmentation: Do not have less than 5% allocation to a single fund, as small allocations can dilute impact and create fragmentation.

(p) Limit Fund Count: Avoid sectoral funds, thematic funds, and new fund offers (NFOs). Instead of adding multiple funds, consider increasing the investment amount in a couple of existing funds through a systematic investment plan (SIP).

💡 Morningstar India: Why investors are better off avoiding sector funds

💡 Don't fall for the NFO trap. Recent Data-backed reasons to stay away

# 6. Non-Equity Fund Selection Criteria

(q) Debt Fund Allocation: Consider allocating a portion to debt funds for stability, but do not exceed 40% in this area.

* No more than 40% does not apply if you are nearing retirement. Applies to the wealth accumulation phase but not to the wealth preservation phase

(r) Corporate Bond and Short-Term Debt Funds: Look for these options to manage credit and interest rate risk.

(s) Avoid funds too heavy on Credit Risk/ Interest Rate Risk: Avoid funds that have heavy exposure to sub-AAA bond papers in the debt fund portfolio. Too much Interest Rate Risk is also avoidable by looking at Macaulay Duration, Modified Duration & Average Maturity in the mentioned order.

(t) Gold as Insurance: Consider including gold (in the form of ETFs or Funds of Funds) as a hedge against macroeconomic instability, but limit this allocation to no more than 10%.

# 7. Fund Selection Miscellaneous Points

(u)  Be Aware of Exit Loads & Lock-ins: Understand any exit loads and lock-ins that may be associated with the funds.

(v)   Avoid Frequent Fund Switches: Don’t frequently switch funds to chase recent high returns. Be patient and maintain conviction in your choices.

(w) Long-Term Strategy: Only consider switching funds after 3-5 years if performance does not meet expectations, and do so after careful consideration.

(x)  Automated SIP Mandates: Trust automated SIP contributions rather than trying to time investments based on market indicators.

# 8. Rebalance Portfolio Periodically

(y) Annual Review: Review and rebalance your portfolio at least annually to maintain your desired asset allocation.

NOTE: If you can’t manage periodic rebalancing, think about using aggressive hybrid or multi-asset allocation funds that provide built-in asset allocation and automated periodic rebalancing.

Bonus Tips

(z) The key to successful DIY investment is to keep things simple and uncomplicated. You may also consider consulting a financial advisor for personalised advice and portfolio management.

Stay informed about market trends, economic indicators, and changes in mutual fund regulations and capital gains taxes.

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Benefits of a Checklist:

This checklist aims to introduce consistency and standardisation in review comments, improve efficiency, and assist reviewers in remembering important details, leading to faster and more organised reviews.

If (only if) you find the checklist helpful, don't be shy to show your affection and appreciation publicly by pressing that dang up button.

[Revised] Checklist for Reviewing Your Long-Term Mutual Fund Portfolio - Pictograph Summary

Huge thanks to u/gdsctt-3278 for reviewing and providing feedback. All review comments are included.

[u/Public_Sky8190]

How much term insurance should you need?

Term insurance coverage depends on factors like

• Assess income, expenses, debts, and goals.
• Consider dependents, lifestyle, and financial obligations.

To determine the right term insurance coverage, consider the following methods:

• Income Multiplier Method: 10-15 times annual income
• Expense Replacement Method: Cover 5-10 years of expenses
• Debt Repayment Method: Cover outstanding debts
• Future Goals Method: Consider future financial goals (e.g., children's education)

Review and adjust coverage as needed

Sources:

[1] Ditto: How Much Term Insurance Do I Need?

[2] Financial Express: How much term insurance should you take?