Financial planning: Give your investment portfolio annual health check-up

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The start of the year is a good time to review your investment portfolio. The review should be done to ensure that your investments are on track to help you achieve your short-, medium- and long-term goals. If there are any deviations, the annual review will allow you to spot them and make the necessary course correction.  

Get the big picture: First, get a consolidated view of all your mutual fund (MF) investments done over time. These could be through systematic investment plans (SIPs), lump sum or systematic transfer plans (STPs). If you use more than one intermediary, look at consolidated account statement (CAS). This is a statement that CDSL or NSDL emails you every month. It lists all your MF holdings and their current values. A detailed statement will also include the transactions done during the period. In case of any discrepancy, reach out to the concerned intermediaries or fund houses directly.

Check asset allocation and rebalance: When you started investing ( especially if you took an advisor’s help), you would have decided on a certain asset allocation. Your asset allocation is the percentage that you decide to allocate to various asset classes, like equities, debt, gold, etc within your portfolio.

An investor might start with a certain asset allocation, for instance, 50: 40: 10 to equity, debt and gold, respectively. But, as time goes by his asset allocation undergoes a change due to the varied performances of the different asset classes that he holds in his portfolio. For instance, with the kind of bull run in equities that we have witnessed over the past few years, his equity allocation might have risen from 50 to 70 per cent of the total portfolio. 

When your portfolio’s asset allocation changes, it is no longer in sync with your risk profile and investment horizon. If equity allocation swells from 50 per cent to 70 per cent, your portfolio becomes riskier than it should ideally be. On the other hand, if equity allocation falls to 35 per cent, your portfolio becomes more conservative than it should be. This could, in turn, affect your long-term returns. Investors could also adopt a more dynamic approach to asset allocation based on market conditions. They could lower their equity allocation in overheated markets and increase it when markets are low. 

To rebalance their portfolios, investors should either sell a part of their holdings in the asset class that is outperforming or direct more of their new money into the asset class that is underperforming.

Track fund performance: Over the past year, the difference in the performance of the best-performing and the worst-performing funds within the large-cap category was as high as 34 percentage points. While it is not necessary that the funds you hold are always in the top quartile, they should not be in the bottom quartile either. 

Another important thing to check is whether your funds have outperformed their respective benchmark indices and category averages.

If you are undertaking a deeper study of fund performance, also look at the historical performance of the fund manager and his investment strategies. If a fund has a good long-term track record, be tolerant towards short-term underperformance. But, any fund that underperforms its benchmark and category average consistently (for five or six quarters) should be replaced. Only by undertaking such a cleansing exercise periodically will you be able to create wealth over the long term. 

Optimise between diversification and consolidation: A portfolio should have neither too many nor too few funds. If there are too many, tracking the performance of all the funds becomes difficult. Excessive diversification also leads to sub-optimal returns. On the other hand, if you have too few funds in your portfolio, you will have difficulty in meeting all your investment goals that would typically be spread across investment horizons. Tax efficiency could also be adversely impacted. 

A retail investor should be able to manage with four-five equity funds (one large-cap, one diversified, one mid-cap, one small-cap, and one sectoral fund), one ELSS (equity-linked savings schemes) fund (for tax saving under Section 80C), two debt funds (one liquid or ultra short-term, and one accrual or short-term), one equity arbitrage (for short-term tax efficiency) and two-three balanced funds (one equity balanced, one dynamic asset allocation, and one equity savings scheme). This will ensure you are adequately diversified while not being overexposed to any particular sector or stock. Investors should also choose between scheme options like growth, dividend payout, and dividend reinvestment to book profits, meet regular income requirement, or to bring in tax efficiency.

Taxation: When rebalancing your portfolio, try to minimise the tax incidence. The capital gains tax is zero if you hold an equity fund for more than a year, and it is 15 per cent of capital gains if you liquidate your position before one year. In the case of debt funds, you can claim indexation benefit and bring down your tax impact by holding your investments for more than three years. If you sell before that, capital gains are added to your income and taxed according to your tax bracket. 

Exit load: Many equity, balanced and debt funds have exit loads. Try to minimise the hit from exit load as well when exiting a fund. 

Closed-end funds and lock-ins: Closed-end funds have low liquidity. It might not be easy to exit these funds and if you persist in doing so, you may have to sell at a discount to the net asset value (NAV). Similarly, ELSS funds have a three-year lock-in. You can’t exit these funds before the lock-in ends.  

If you have done a lump sum investment, calculating your holding period (as is required to know how much tax has to be paid, whether exit load applies, and whether the lock-in in an ELSS fund has ended) is simpler. But, if you have invested through SIPs or STPs, calculating the holding period becomes more complicated (since it differs for different tranches of investment), and should therefore be carried out with care. 

If the entire task of reviewing your portfolio appears too difficult or complicated, seek expert help from an investment adviser or a good online platform. They will help align your asset allocation and fund selection to your goals.

What an annual portfolio review entails

  • Get a consolidated account statement
  • Check asset allocation to different asset classes
  • Check allocation to large-, mid- and small-cap funds
  • If asset allocation has changed, rebalance your portfolio
  • You may sell a portion of the assets that have outperformed; invest new money into asset classes that are underperforming
  • If you have invested via SIP, be careful about calculating the holding period for judging tax impact and exit load
The writer is co-founder,, an online advisory and investment platform

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