For a long-term investor, it is important to review the portfolio composition periodically so that it not only remains on track but also doesn't take him beyond his risk-taking capacity. Although there is no hard and fast rule about the periodicity of the review, it certainly helps in maintaining the discipline of reviewing the portfolio at fixed intervals. For example, one can make a beginning by reviewing the portfolio twice a year.
Remember, reviewing the portfolio requires the same amount of discipline as at the time of making investment. Considering that ever changing world of investments throws up challenges to investors every now and then, a haphazard approach to tackle them can put their financial future at risk.
Therefore, it is necessary for investors to have a strategy in place to monitor their portfolios to get the best out of their investments. If you are wondering how to begin this process, here is what you need to do:
- The most important part of your investment strategy should be your asset allocation process. If your asset allocation is too aggressive, you must rebalance it to bring it in line with your risk profile and time horizon. Similarly, if your asset allocation is too conservative, you must make it a little more aggressive by including an asset class like equity in your portfolio or by increasing exposure to it for giving your money a chance to earn positive real rate of return.
- You must review your insurance portfolio. Make sure, you have adequate risk cover in the form of life insurance so that your dependant family members do not face any financial hardships if something untoward were to happen to you. It is equally important to ensure that your family is well covered through a health insurance plan.
If you have been following a strategy of mixing your investments with insurance and have accumulated a number of policies, you should look to change in a gradual and systematic manner. Remember, it's not the number of policies but the quantum of risk cover that should matter to you. A term insurance plan is an ideal product to reduce your costs and to ensure adequate life risk cover. Similarly, for a young family, a family floater health insurance policy would be ideal.
- Investing to save taxes should be an integral part of your overall investment planning . If you have been investing haphazardly to save taxes, it's time to change that. You must ascertain the tax liability for the year and consider amounts already committed to options such as provident fund, insurance premium, housing loan repayment before deciding how much to invest in other options such as PPF, ELSS and NSC etc. Moreover, by following the right approach for investing to save taxes, you will not only benefit from higher tax savings but also improve your returns.
- If you have been investing in equity funds through SIPs on and off, it's time to invest with a clearly defined time horizon. Remember, equity as an asset class, requires time commitment to benefit from its true potential. Besides, the more time you give your equity investments to grow, the more you benefit from power of compounding.
All of us face a number of challenges through our investment time horizon. These could be relating to choosing the right mix of assets, investment options and monitoring the portfolio. Unfortunately, rather than following the proven strategies, many of us work out different strategies to suit our temperament and hence achieve a different level of success.
Investors also suffer because they do not give due importance to an important factor like real rate of return i.e. gross returns minus inflation, taxes and costs. Most of us focus on gross return and make that the basis of our investment decisions.
No wonder, traditional instruments like fixed deposits, small savings schemes and bonds/debentures continue to be the mainstay of portfolios of a large section of investing public in our country. Although these instruments provide guaranteed returns, their returns are low and tax inefficient. Needless to say, the real rate of return for investors in these products is either bare minimum or negative at times.
Inflation is crucial to investing as it reduces the value of your investment returns. Broadly speaking, inflation affects all aspects of the economy. However, from investors' point of view, the most challenging aspect is to keep up with the rate of inflation in order to protect the value of their investment as well as returns earned on it.
As is evident, if you want your money to grow in value and not just in numbers, you must consider factors such as inflation, taxes and costs while making investment as well as while reviewing the portfolios.
One of the asset classes that have the potential to beat inflation over the longer term is equities. However, investing in equities would mean taking higher risk as compared to some of the instruments that give pre-determined or stable returns. Thankfully, there are strategies like "systematic investing" that can help you tackle the risk of volatility to a large extent.
Another important aspect is to analyse the composition of your equity funds portfolio. It is important because by having the right exposure to different market segments you can create a balance between risk and reward.
It is quite common to see investors making their equity fund portfolio quite aggressive by investing in categories such as sectors and thematic. So, if you are one of those investors who have these aggressive funds in your portfolio and are wondering what to do with them in the current market conditions, it's time to have a closer look at your overall portfolio composition.
If you are not sure whether you considered all the factors needed to be considered before investing in these funds, you must do it now to find out whether you should remain invested in them or not.
Remember, aggressive funds can help you enhance your overall portfolio returns. However, the key is not to hold them in a large proportion and also avoid investing in those sector funds that may require frequent changes.
Hemant Rustagi is the CEO of Wiseinvest Advisors
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