Keep An Eye On Your Portfolio Composition

CEO, Wiseinvest Advisors

In today’s challenging financial environment, it is important for you to ensure that your portfolio is designed to help you achieve your goals and that it remains on track at all times. In fact, how you start your investment process lays the foundation of investment success. Therefore, you must have an investment plan as well as a strategy in place to implement it. Those investors who do not realize the importance of this process usually fail to achieve much from their investments.

It is quite common to see investors abandoning their long-term investment plan when faced with vagaries of the stock market. Needless to say, a haphazard investment approach and the absence of a clearly defined selling strategy often compels them to make abrupt changes in the portfolio. These ad hoc decisions seriously dent their chances of creating sufficient corpus for some of their critical goals such as children’s education and retirement planning.

As is evident, you must plan your investments and review the portfolio composition periodically to ensure that it not only remains on track but also doesn’t take you beyond your 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.

Here is what you need to do:

·         The first priority should be to analyze your asset allocation. If it is too aggressive, you must rebalance it in line with your risk profile and time horizon. On the other hand, if your long-term asset allocation is too conservative, it’s time to either start investing in an asset class like equity or increase exposure to it to give your money a chance to earn positive real rate of return. 

·         Review your insurance portfolio. Make sure, you have adequate risk cover in the form of life insurance, health insurance and property insurance. If you have been following a strategy of mixing your investments with insurance and have accumulated a number of policies, it’s time to change that. 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 risk cover. For a young family, a family floater health insurance policy would be ideal.

·         If you have been investing haphazardly to save taxes, it’s time to change that. The right way to do so would be to make tax savings an integral part of your overall investment plan. Besides, while planning your investments under section 80C, ascertain how much you have to invest in compulsory options such as PF, insurance premium, housing loan repayment, etc. and then decide the amount for other options such as PPF, ELSS and NSC, among others. 

·         If you are eligible to invest in Rajiv Gandhi Equity Savings Scheme that allows income tax deduction of 50 per cent on an investment up to Rs 50,000 either in specified stocks or funds, you must seriously consider investing in it.

·         If you have been investing in equity funds through SIP 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 the power of compounding. 

It is important to analyze the composition of your equity funds’ portfolio on a yearly basis. Remember, by having the right exposure to different market segments i.e. large, mid and small-cap, 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 sectors and thematic funds. So, if you are one of those investors who have these aggressive funds in your portfolio in a high proportion 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. The exposure to such funds should not be more than 10 per cent of the portfolio.

Depending on your time horizon and the need for liquidity, mutual funds offer you a variety of debt funds such as ultra-short-term debt funds, short-term debt funds and income funds following a duration, income and credit opportunity strategy. If you are looking to invest in income funds, you need to tread carefully and select the funds based on your time horizon. If you intend to invest for a time horizon of three years or more, dynamic bond funds can be the best option as the interest rates are structurally headed lower. Remember, while funds following the strategy of taking credit risk may appear attractive on the basis of recent past performance, you should invest in them only you have the risk appetite and an understanding of the attendant risks.