Do you regularly review your investment portfolio? If not, it is time to start! It is one of the most important steps in the direction of good money management. If they remain unchecked for a long, your investments may begin deviating from the purpose of investment. So, how to review your investment portfolio and how often?
Here, we will present some expert curated strategies on review of an investment portfolio that will guide investors on how frequently they should review their portfolio to fetch returns as per expectations.
Why is review of an investment portfolio crucial?
Here are some of the top reasons why reviewing a portfolio periodically can make a significant difference in fetching desired returns:
- Portfolio health check
Just like you would do an annual health checkup to make sure that all is well with your health, the idea of an investment portfolio review is to do its health check-up. This helps you to know whether your fund allocation continues to be aligned to your goals, the investment horizon is being adhered to, your financial situation is as per expectations, and the overall risk tolerance is not breached.
- Relative asset class performance
Portfolio review can help you gauge the performance of your investments against the market performance of relative asset classes. You can also analyse the performance of your investments against their benchmarks to get a fair idea about the suitability of remaining invested in the asset or fund. If the asset or fund has been underperforming as compared to its benchmark and peers for a while, it may be time to exit the same and look for alternatives.
- Rebalancing portfolio
Portfolio review can also help in rebalancing it at the right time. With rebalancing, you can adjust your investments to ensure an ideal asset allocation as per your financial goals. For instance, if you have chosen an asset allocation of 60% equities and remaining bonds, as stock prices rise, your allocation may effectively rise to 70%. This indicates that you must sell some of the equity investments to come back to the original allocation levels. This will help you maintain the portfolio risk within comfortable limits.
When should you review your investment portfolio?
The below-mentioned points can help you know when it is the right time and frequency to review your investment portfolio:
- Sudden market movements
During market fluctuations, it makes sense to conduct a review of your investment portfolio, especially if it consists of assets that may be unfavorably affected to a great extent. Some of these investments can include stocks, equity mutual funds, exchange-traded funds, etc. Due to market movements, the portfolio’s asset allocation may be skewed, hence a review can help in rebalancing them in time.
- Financial year end
To ensure proper investment planning, it makes sense to review your investment portfolio at the financial year end. You may consider the avenues that work as tax-saving options by balancing the gains from some against losses from few investments. This can also help in reducing overall tax liability.
- Tax changes
By reviewing an investment portfolio every year, you can realign the investments as per new tax regime or developments that may be announced in the annual budget. Certain changes in tax laws can make certain avenues more attractive while others less attractive. With an investment review post budget, this task can become easier and effective in timeline realignment for maximum profits.
- Changes in personal finances
You must review your investment portfolio whenever you experience any drastic changes in your personal financial situation. Any change in your personal scenario calls for immediate analysis and revision of an investment portfolio. It could be negative scenarios like job loss or increase in dependents, etc or it could also be a sudden rise in income, financial liberty, etc.
- Quarterly review
Many experts suggest adopting a practical approach of investment portfolio review by doing a quarterly analysis of the same. A quarterly check offers an opportunity to inspect the current worth of all the assets in the portfolio. This helps in understanding and distinguishing productive versus unproductive investments. It allows you to make timely amendments to a problem area in the portfolio. You can also save time with such periodic reviews instead of evaluating once a year.
Once you have an investment portfolio, you will notice many triggers that indicate review and rebalancing. Apart from checking the returns, always keep an eye on whether your portfolio risk has drifted beyond your comfort level. Whether you review your investment portfolio once a year or more frequently depends on your financial goals. You may have invested to meet certain short-term or medium-term goals and this requires frequent review. As against, long-term goals may demand reviewing the portfolio once every few years.
Investing helps to achieve your goals. With investments, you can save as well as accumulate wealth for the future. Making regular investments also ensures financial discipline, which can benefit you in the long run.
Some of the commonly preferred investment avenues in India include mutual fund investments, stock market investments, gold, bank FDs, PPF, and NPS.
Inflation results in rising prices of goods and services. With the help of the right investment options, you can ensure that you will have sufficient income in the future to pay for higher prices of goods and services due to inflation.
Bank FDs offer more security but lower returns, while mutual fund investments may involve a certain level of risk but can offer comparatively higher returns. Choosing between the two depends on personal risk-taking ability and investment preference.
Depending on what your portfolio currently comprises, you can do rebalancing by including investments that are less risky and offer stable returns such as debt mutual funds.