Equity funds are mutual fund schemes that invest in companies’ stocks and shares. With high growth potential, diversification, and easy accessibility, these funds can add high value to your investment portfolio. But simply buying and holding onto an equity fund is not enough. Equity funds are volatile in nature and provide returns by taking an above-average risk. They can be affected by different factors, such as company performance, economic conditions, and political factors.
Let’s say you invested in an equity fund that performed well in the first year, and you were happy with the returns. But, in the second year, the fund started underperforming, and you didn’t pay much attention to it. After a few more months, the fund’s value significantly dropped, and you suffered a huge loss. This scenario is not uncommon, and it shows the importance of monitoring your equity fund investment.
With that being said, here are 4 major reasons that explain why you must monitor your equity investment for a profitable portfolio and long-term success.
- To track its performance
Equity mutual funds have the potential to deliver higher returns in the long term, but there might be times when it underperforms. As an investor, you must monitor such fluctuations to evaluate if the investment is underperforming and need adjustments.
Tracking your fund’s performance is also important when planning your future goals, as it helps you strategically align them with market trends.
- Re-balancing of your mutual fund portfolio
Monitoring your mutual fund portfolio from time to time helps you ensure that it remains balanced. A poorly balanced portfolio can lead to missed market opportunities and potential losses.
For example, suppose your target allocation is 60% stocks and 40% bonds. But the stock market has performed well, and the value of your stock holdings has increased to 70%, while the bond weightage is now 30%. To re-balance, you may sell some of your stock holdings and buy more bonds to restore the 60/40 allocation.
Rebalancing your portfolio can help you manage risk and prevent it from becoming too heavily weighted in one asset class or sector.
- Diversification opportunities
Monitoring your equity fund investments can help you find diversification opportunities.
For example, if you have a large allocation to technology stocks, you can diversify into other sectors, such as healthcare or consumer goods. Or, if your portfolio has a significant portion invested in small-cap stocks, you may think of adding exposure to some large cap mutual funds for more diversification and stability.
Regularly reviewing and monitoring your equity fund investments can also help you identify any overlap in holdings. If you have multiple funds that hold similar stocks, you may be unintentionally doubling down on certain positions and increasing your overall risk.
- Get insights into gains and losses
By monitoring the performance of different types of equity funds in your portfolio, you can find out which funds have delivered strong returns and which have underperformed. You can compare their performance with different funds within the same category for more clarity on gains and losses.
Also, tracking your gains and losses can help you understand your tax liability better, allowing you to plan ahead. Suppose you have held an equity fund for more than a year. Here, you will be subject to long-term capital gains tax (LTCG), which is usually less than short-term capital gains tax (STCG). Knowing this allows you to prepare in advance for tax season, take advantage of available exemptions, and reduce your overall tax liability.
Monitoring your equity fund investment and tracking key metrics, such as the fund’s NAV, performance, turnover rate, and market trends, is important for long-term financial stability. As an investor, it is your responsibility to track your fund’s performance and identify any issues before they become huge problems. This way, you can keep your portfolio well-balanced and ensure you make the most of your mutual fund investments.