Reviewing your portfolio

Making a mutual fund portfolio is the ultimate goal of our financial plan. We take a lot of pain before making it; however, once prepared, we are relieved that our process is complete. Nonetheless, making your portfolio is only the starting point, and the job of creating wealth further as well as reaching your goal remains a long journey. Be it your vehicle or your health, everything needs a regular check-up and that is also true for your investments also.

There are two important factors around which, you need to review your portfolio. First is the frequency, and the second is the factor that needs to be reviewed in your portfolio. A quarterly review is recommended for most investors, followed by a thorough examination once a year.

Annual portfolio review

While reviewing your annual portfolio, you need to check the following points:

Major asset allocation

At the end of the year, there is a high probability that your asset mix in terms of equity, bond and cash might have changed. You need to bring the asset allocation to your original or planned asset mix. If you fail to do this, you may find your portfolio underperforming or at a higher risk than what you can take.

Sectoral exposure

While doing your annual portfolio review, it is important to check for sector exposure. If your portfolio has tilted towards any particular sector, you should bring it back to the required level by trimming your exposure to the fund due to which, you have increased exposure to the sector.

Exposure to individual companies

You check your portfolio and chances are high that in most of the funds that you own have Reliance Industries or HDFC Bank or both. You need to check the exposure to these stocks in your overall portfolio. This will help you to determine whether unintentionally, you have invested in the stock that has generated the best returns last year and now forms 15 per cent or more of your total portfolio, which may or may not see a drastic drop next year but can have a tendency to impact your overall portfolio returns. Hence, weed out or scale back those funds that are heavy on such stocks so that, your portfolio can reach a safer limit. 

Rebalancing

The annual review should ideally culminate in the rebalancing of your portfolio. Some of the concepts of rebalancing may seem to be counterintuitive for most of us as they may warrant you to sell some of your best performing funds. Nonetheless, you should always follow that cardinal rule of investing that is, selling high and buying low. Moreover, if you continue with the same portfolio, it may entail a lot of risks.