Adjust your Investment Portfolio - Few Pointers

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Adjust your Investment Portfolio

Over the past 12 months, your house may have become messy and cluttered with unwanted and unused items. All the unnecessary stuff needs to be thrown out to make place for the new. While you are at it, don't forget to spring-clean your investment portfolio as well. It is likely that it has gone out of shape over time. Experts say that one should review the portfolio at least once a year, and the start of a new financial year is the perfect time to do so.

Strike the right balance
The portfolio review exercise should begin with rebalancing the asset mix. The allocation varies across investors and is based on the individual's risk appetite and financial goals. Over the past 12 months, this allocation would have changed, given that the various asset classes give differential returns. Equities were the biggest gainers in the past 12 months, fixed income was muted, while gold gave negative returns.

 

If you let things be, there is a danger that the allocation will alter the risk profile of the entire portfolio. This is why rebalancing is so critical. Rebalancing your portfolio ensures that you stay invested across all asset classes at all times and can thus benefit from any uptick. However, do not move in and out of investments on small fluctuations in the asset mix. Rebalance only if the allocation towards any asset class has fallen substantially out of. Change only if the deviation from original allocation is more than 10 percentage points.

Your asset allocation is based on your risk tolerance and financial goals. Unless there is a fundamental change in your risk profile, stick to the original plan throughout. Rebalancing may seem difficult at times because it requires you to take some hard investment decisions, but if you carry out this exercise diligently every year, your portfolio is likely to deliver superior returns than if it were left unchanged.

Investors tend to accumulate investments that do not really suit their needs. Insurance policies top the list of such meaningless investments. Continuing with them is akin to throwing good money after the bad. It is important that you identify and throw out the laggards in your portfolio. Here's how to go about it.

MUTUAL FUNDS - Sell underperforming schemes

While it is not possible for a mutual fund scheme to remain the best performer for all times, investors must review the performance every 6-9 months and then take a call. Junk the fund if it fulfils the following parameters:

Fund consistently underperforms peers

Sure, performance is important, but don't dump a scheme just because it has done badly in one or two quarters. If the scheme underperforms consistently over a longer term, it's a good reason to switch to a better fund. Just make sure that you make an apple-to-apple comparison. Don't compare a diversified scheme with a sectoral fund or a large-cap fund with a mid-cap scheme.

Fund has deviated from objective

You choose a fund because its objectives were aligned with your needs. If the fund deviates from its stated objective, you should consider exiting it. Fund managers sometimes take investment calls that do not match the stated objective of the scheme. For instance, a mid-cap fund may invest in large-cap stocks or a value oriented scheme could pick up growth stocks. In both cases, the funds will disappoint investors by not delivering the returns they expected.

A star fund manager has left

A change at the helm should not be a reason for dumping a fund. Even if a star manager leaves a fund house, you should ideally give some time to the incoming fund manager to prove his credentials. A fund house with robust investment processes will be able to deliver the same performance, regardless of the person managing the fund. However, exit the scheme if the fund house itself relied too much on the manager.

Your target is achieved
If your target amount for a certain goal has been achieved, then you should redeem the investment. There's no point in remaining invested. You will only expose your investments, and the financial goal, to needless risk. Equity returns go through a cycle and if you find that your goals have been met, it is better to withdraw your money and reduce your risk.

Don't keep holding STOCK losers forever

Equity markets are on a roll, but not all stocks are doing well. If you have some lemons in your portfolio, get rid of them now. The following pointers will help identify stocks to junk:

Fundamentals have worsened
You bought a company's shares because it boasted a strong competitive advantage, quality management, superior product mix or a large order book. However, what if the tide turns against the company and positive factors wane? You should reassess the company's outlook and sell the shares before the rot sets in. Instead of sweating over a particular stock that is moving erratically or is too volatile for your liking, you could replace it with a more stable candidate.

Price has shot up too quickly

At times, you may hit the jackpot with a particular stock. The price may suddenly rise by 20-30% within a few weeks. This reinforces your belief in the company and makes you giddy with greed. You are convinced that this sudden spike is just the beginning of a much bigger uptick. However, temper your excitement and be more circumspect. A dramatic appreciation could be due to reasons that are not related to the company or mere market speculation. In such a case, it would be better to pocket your gains and look for other opportunities, unless you are absolutely certain about the company's prospects.

Price dips below a threshold level

Your stock picks may not always work out as expected. Despite the hours spent on researching the company and ascertaining the future prospects of the company, the share price may still go south after your purchase. In most cases, we tend to convince ourselves that this is just a temporary setback and that the stock will bounce back. But there could be genuine reasons for the fall in stock price. One of the biggest mistakes that small investors make is to get tied to a price level. They will hold on to a stock endlessly, waiting for it to reach the previous high at least their own buying price. If you don't et out in time, you might end up with an even bigger loss. Instead of holding on to a dipping stock, learn to cut your losses and move on. Ideally, you should keep a downside limit or floor, which should trigger a sale, also referred to as 'stop loss'. Experts usually advocate a stop loss of 15-20% below the buying price, depending on your risk tolerance level.

Better opportunities exist

In the past few months, you may have come across several good stock investment opportunities. Perhaps there was a turnaround in a cyclical stock or a company benefited from a policy change. If you are absolutely convinced about the potential of this opportunity, you could consider dumping your underperforming stocks. It would be better to get rid of the underachievers and seize the new opportunity to recoup your losses. Don't make the mistake of selling your winners to buy these stocks. The upcoming earnings season will also throw up some great investment opportunities.

Get rid of high cost INSURANCE policies

For Indians, life insurance is the favoured financial investment. Almost 20% of their total household savings flow into life insurance. However, more often than not, this money is directed towards the wrong policies. People pay high premiums for multiple insurance policies yet get inadequate life cover. If you also have such high-cost policies in your portfolio, consider getting rid of them. These are only eating up a lot of premium, but offering little value in return. Here are some pointers to help you identify what policies you need to get rid of:

Analyse If the Insurance cover adequate?

Life insurance policies are primarily risk mitigation tools, but most buyers look at them as savings and investment vehicles. This is why the cover they offer is woefully inadequate. A thumb rule says that one should have a life cover of at least 6-7 times his annual income. If your policies do not provide that kind of cover, consider buying more insurance. Only a pure term plan might give you adequate protection, but you may have to get rid of the costlier plans to make place for cheaper ones.

See If Insurance fit your financial plan

Any investment should have a role to play in your overall financial plan. Different insurance policies cater to different needs. For instance, endowment plans help build a tax-free nest egg, while money-back policies give out periodic payments. Ulips help create wealth through equity investments. Ensure that you do not keep policies that do not fit your requirements. If you have a steady job and a rising income, your money-back policy is of no real use. An endowment policy will be unsuitable if you are not content with low, but guaranteed, returns. A Ulip may be more suitable for younger people, but at an older age, traditional policies offering guaranteed income make more sense.

Can you afford the premium?

While you must ensure that your policies provide adequate cover, you must also check if you can afford the premium that you are shelling out annually. If the premium is so high that it impinges on your other financial goals and lands you in a financial straitjacket, it does not make much sense to continue with such policies. You can free up a lot of your savings which are flowing towards unwanted policies. Also, remember that your insurance needs get lower as you accumulate assets over time. If these assets are sufficient, then you do not need so much insurance cover.

 

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