Should you continue to invest in your existing mutual fund plan or start a new fund?

Our income tends to grow with time. We will have incremental amounts available for investment towards existing financial goals and/or new ones. A common dilemma that most investors face is whether the incremental investment amount should be put in existing Systematic Investment Plans (SIPs) or whether you should start investments in new mutual fund schemes. In this article, we will try to answer this question by evaluating the performance of existing schemes.

Performance review of existing schemes

When investing in mutual funds, you must review the performance of the existing schemes on a half-yearly basis - or at least once a year. If the five-year returns are satisfactory, you may invest incremental money in the existing schemes. In terms of returns, you must review the performance on the following three parameters:

1. Expected returns: Compare the actual returns of your schemes with the expected returns. If the actual returns are higher than expected returns, you are on track to achieve your financial goals. Based on your risk profile, financial advisors decide the asset allocation and, accordingly, the expected rate of return.
    
2. Benchmark returns: Every mutual fund scheme has a benchmark that it aims to outperform. So, if the existing returns of your schemes are higher than the benchmark returns, you have chosen the appropriate schemes. It makes sense to continue with the existing monthly SIP plan in such a scenario, and you may consider adding incremental money to the existing SIP investments. When comparing returns, be sure to compare the returns over a five-year period.
    
3. Peer returns: You should compare the returns of your existing schemes with their peers. For example, if you have invested in a large-cap scheme, compare the returns with other large-cap schemes. If your scheme is doing better than its peers, you have chosen one of the best equity funds in the category. Continue with the existing monthly SIP. You may even add incremental funds to it. Many times, it may happen that peers are performing better than your schemes. But if your scheme returns are better than expected returns and benchmark returns, continue investing. As long as you are able to achieve your financial goals with higher than expected returns, it is okay even if some peers are performing better than your scheme.

Also Read: Types Of Returns: Absolute Return, Rolling Return, IRR, XIRR, CAGR

Investing in new schemes

In the above section, we discussed how if your schemes are doing well, you can continue with them. You may even add incremental investments for wealth creation. However, if your schemes are not performing well, consider starting a SIP in new schemes. While considering starting a SIP in new schemes, apart from returns, you should consider the following points:

1. Your age: As your age increases, usually your risk appetite reduces. Let us assume that you began your existing investments 5-10 years ago and are now considering starting new SIPs. As you are now 5-10 years older, your risk appetite may have reduced. Suppose you earlier invested in diversified equity funds, thematic/sectoral funds, or a combination, you may now consider investing in hybrid mutual funds due to a reduced risk appetite.
    
2. Your financial responsibilities and liabilities: Let us continue with the earlier example. As you are now 5-10 years older, circumstances may have changed. You may have got married and may be having a child. You may have taken a home loan. These circumstances could have led to a change in your risk profile from aggressive to moderate. In such a scenario, when considering a new mutual fund investment, consider hybrid funds with two asset classes or multi-asset class funds with three asset classes.
    
3. Your investment time horizon: Continuing with the same example, as you are now 5-10 years older, the investment time horizon to achieve the financial goals may have reduced by 5-10 years. In such a scenario, if the time horizon left to achieve financial goals is less than five years, you may consider focusing more on debt funds with some allocation to hybrid funds.

Also Read: Derivatives: Are They A Good Investment Option?

Performance of mutual funds in various categories

In the above sections, we discussed why an investor should consider investing in diversified equity funds, thematic/sectoral funds, hybrid funds, etc. Let us now look at the returns that some of these funds have delivered.

Best equity funds in the large-cap category

We have large-, small-, mid-, multi-, and flexi-cap funds within the diversified equity funds category. For comparison purposes, we are considering the returns of large-cap funds.

Note: Returns are as of 17 July 2022. The above are direct funds with growth option. The returns for 3 and 5 years are CAGR. The funds have been ranked on 5-year performance.

The above table shows how the top five large-cap equity funds have delivered 5-year returns in the range of 11.51% to 13.72% CAGR.

Best funds in the sectoral/thematic category

Note: Returns are as of 17 July 2022. The above are direct funds with growth option. The returns for 3 and 5 years are CAGR. The funds have been ranked on 5-year performance.

The above table shows how the top five sectoral/thematic equity funds have delivered 5-year returns in the range of 21.57% to 26.99% CAGR.

Best funds in the hybrid category

The hybrid category is a wide category with eight sub-categories. So, for comparison purposes, we will look at the returns of aggressive hybrid funds.

Note: Returns are as of 17 July 2022. The above are direct funds with growth option. The returns for 3 and 5 years are CAGR. The funds have been ranked on 5-year performance.

The above table shows how the top five aggressive hybrid funds have delivered 5-year returns in the range of 11.77% to 17.91% CAGR.

Also Read: 6 Reasons To Drop Your Mutual Fund Investment

Incremental investments: Existing funds or new funds?

It had been mentioned earlier that you should compare the returns of your schemes with expected returns, benchmarks, and peers. If the returns are better, you should continue with the investments. You may even consider making incremental allocations to existing schemes. If the returns are not as expected, it's time to look at new schemes. While exploring new schemes, apart from returns, remember to consider factors such as your age, financial responsibilities and liabilities, investment time horizon, etc.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.