Here’s How To Keep Your Portfolio On Track

One of the aspects that often derail investors’ portfolios is inconsistency in their investment process. Many investors invest on and off, thereby ignoring the principle of following a disciplined approach. No wonder, they often struggle to achieve investment success. If you are a serious investor, you must put aside a part of your income as it allows you to achieve your different goals over different time periods through smaller contributions and also helps in tackling the volatility of the marketplace. It is equally important to plan your investments and be decisive while taking certain important decisions at different stages of your defined time horizon.

If you are a new investor, your first important decision could be about which asset class to invest in and in what proportion. It is important because asset allocation lays solid foundation for a successful portfolio. Similarly, for an existing investor, the decisions could be pertaining to weeding out non-performing investment options in the portfolio and the need to rebalance the portfolio from time to time. Investors react to these situations differently and hence take these decisions with varying degree of success.

It is a proven fact that mutual funds score over other investment options in terms of transparency, flexibility, tax efficiency, variety and convenience. Besides, the full-time professional fund managers mange investments with the help of a research team. Hence, mutual funds should be an integral part of your portfolio. Of course, to get the best out of them, you must select the funds carefully as well as have a strategy in place to exit from them. Here’s how you can tackle these issues: 

How to select funds?

Investing in different type of funds - especially equity funds - can be a little tricky for investors. While on the one hand there are investors who invest in equity funds to benefit from the momentum in the stock market, on the other hand there are those who do not give enough time to the fund managers to perform. Both these situations can adversely impact their portfolios and may compel them to compromise on their investment goals. The truth, however, is that well-diversified funds should be the mainstay of the portfolio. Besides, one should invest in those funds that are consistent both in terms of long-term performance as well as following their investment philosophy.  It’s true that even the most diversified and high-quality funds suffer when the stock market spirals downward; the impact is usually much less than the broader market.

How and when to weed out non-performing funds?

An important factor that ensures investment success is monitoring the portfolio performance. However, you must analyse the relative performance i.e. vis-a-vis the benchmarks and the average return of the peer group. It is equally important to act decisively when a fund fails to keep pace with the peer group. Another situation that may require you to realign your portfolio could be the changes in your personal situation.

While it is good to see more and more investors taking so much care while taking investment decisions, many of them still act in haste when it comes to making a selling decision. Although equities are essentially a long-term investment option, different investors may have different reasons to cut short the holding period. Whatever the reason, it is important for you to have a proper strategy to avoid taking decisions that are dictated by the emotions rather than any logic.

Many investors make the mistake of either holding on to funds for too long or exiting in a hurry. Therefore, you must do a thorough analysis before taking a decision to sell. It is quite common to see investors err by selling funds without giving them adequate time to demonstrate what they can do. In other words, you should hold a fund long enough to evaluate its performance. Remember, a long-term track record moderates the effects of unusually good or bad short-term performance on a fund’s track record. Besides, longer term track record compensates for the effects of a fund manager’s particular investment style.

Another reason to sell a fund can be when it outlives its utility to you as an investor. It could be because of change in your needs, risk profile and time horizon. A situation like this would generally require you to carefully examine your changed circumstances and then realign the portfolio.