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A review of an investment portfolio is necessary and important as it helps to track the tax responsibilities and keep the growth momentum stable. It also helps to evaluate if a person is headed in the right direction to reach financial goals.
There are many factors that influence the portfolio and it is important to evaluate whether the portfolio is giving returns as was initially planned. The holdings in the portfolio should have low volatility and price fluctuations and enough liquidity to meet the urgent requirements. The portfolio will generate interest and dividends which have to be utilized prudently. Steps have to be taken to protect the capital from heavy losses. There are different asset classes and a person should be able to analyze how the assets behave under different conditions. They should be aware on why they have made a particular investment and also the holding period.
There are many events in a person’s life like marriage, the birth of children, and retirement, and the portfolio should be reviewed to keep in line with the changes in life. The steps to be followed for a review are-
1) The review of a portfolio should be done as a whole. You should have all the details in one place. There may be investments in fixed deposits, bonds, EPF, PPF, shares, mutual funds, gold, cryptocurrency, and insurance. All the investments should be reviewed at one time and not individually and separately. The records should be maintained in a diary or an excel sheet.
2) To progress in life an individual should set their financial goals and strive to achieve them. The review keeps them on the path to reaching their financial goals.
In the short term, they should take care of repaying their debts and make income sources stable. There may be extreme volatility in the stock and crypto markets which may have moved the investments away from the defined goal. The plan should be re-evaluated to reach the financial goal. Every person has different goals, which may be like buying a dream home or taking an early retirement and re-evaluation makes it clear what a person has achieved and how far they are away from the remaining goals.
The goals should be SMART and achievable and there may be situations in life like a marriage or divorce, a change in job, or the birth of a child. A person will need to reassess their investment goals again as there may be some unexpected events that may make certain goals redundant. Sometimes due to these unexpected events, short-term goals may have to be put on hold. So reviewing a portfolio is always necessary.
3) Everyone has some expectations from their portfolio and the expectations should be defined at the beginning itself. If you are a conservative investor then you can set expectations on an 8% return, when you are moderately aggressive the expectations can be set at 10%and when you are very aggressive the expectation can be 15%.
The second method is to add the premium to inflation and this is the inflation + X method. As an example, the long-term inflation is 6% in India and you can add a premium of 5%, 6%, 7%, 8%, or 9% over the inflation rate. These are the two methods to set the expectations on the returns.
4) Investment and tax savings should go hand in hand. Check if you have availed of the tax-saving opportunities and invested in ELSS and tax-saving fixed deposits. When you review your portfolio before the year’s end you can adjust your plan to comply with the new tax regime and get maximum benefits. See which investments have the potential to generate good returns after taking into consideration the tax savings. Calculate the post-tax returns and preference should be for instruments that offer higher returns than those having tax benefits but lower returns.
5) The next step is to check the asset allocation i.e. the amount invested in different assets. The asset allocation should match your risk tolerance and the time horizon you plan to hold these assets. Over a period of time, you may find that the performance of various assets has changed and some may have performed much better than others. As an example, your portfolio may have more equity due to the returns generated. Investors who are nearing retirement would be saving a lot of stress if they de-risk their portfolio by reducing allocation to equity and increasing the proceeds towards debt funds. Diversification across the asset class reduces the volatility of the portfolio and allocation according to age would help to tide over the poor-performing assets where the remaining assets would make up for the gap. Always have the right asset allocation and diversification to tide over market volatility.
6) The major reason for the review is to check how the portfolio has performed. The comparison should always be made to the right benchmark for mutual funds. There may be various assets in your portfolio like debt, gold, and equities and even in the equities, there would be large caps, mid-caps, and small caps. The various benchmarks are as mentioned below-
Gather all the information and enter it on a spreadsheet which would include assets like gold, FDs, EPF, PPF, debt fund, equity funds, mutual funds, and cryptocurrency. Suppose you were expecting a return of 10% and the return are coming less then you can change the allocation of the assets in the portfolio.
7) Rebalancing of the portfolio can be done to maintain better risk control and to remove the underperforming assets. Reallocation can be done by switching the allocation between the asset classes. Rebalancing can be done when there is a major deviation from the original portfolio and the plan. Review is an ideal opportunity to rebalance the portfolio. Rebalancing can enhance the performance of the portfolio and reduce concentration in a particular asset class.
The investment portfolio review will add value to the financial plan. It can be conducted on an annual basis and when done at the start of a financial year a person will have better visibility of cash flows and tax changes.
When you review your portfolio and are careful about taxes you can do tax harvesting in stocks. Tax harvesting is the practice of selling stocks that are running at loss, and by harvesting a loss a person can offset the gains made in the stock portfolio.
A person may be near retirement and they can slowly start shifting their investments towards bonds and debt funds and do the de-risking. While reviewing the portfolio always ensure that you have six months of living expenses in cash for any emergency, and gig workers can even hold up to nine months of expenses in cash.
The review of a portfolio should be done at least once every year as there is always a change in the economic outlook that can affect the performance of the portfolio. Reviewing the portfolio can help a person keep in sync with their financial goals.