If you are just starting to invest, I would suggest reading my other blog posts on where not to invest, different type of mutual funds, how to make money in stocks, best mutual funds and real estate vs mutual funds to begin with. If you have already invested read on to find how to review investment portfolio. The only thing predictable with financial market is its unpredictability. Hence, you need to monitor and review your investment portfolio from time to time. And if needed, revise the portfolio.
Importance of a review process
Your initial calculations or the goals you have set could go awry because of volatility. And it could be both ways. Your investments could either receive a boost or they may go down. Hence, just making an investment is not enough. Successfully monitoring, reviewing and rationalising your portfolio is equally important. Of course, I don’t mean that you should review investment portfolio every day or every month. There is no thumb rule here, but typically you should give your investment a time period of 12-18 months before you take a decision to stay invested or move out. The thumb rule can of course change, in case there is a dramatic event that leads to a market crash or markets becoming unreasonably high.
Steps to review investment portfolio.
1. Compare performance:
I am sure most of you would have taken competitive exams or at least school tests. While in most of the exams you received an absolute mark or grade, the grade in itself didn’t tell you much unless compared with how to topper has done. For example, 70% marks in IIT JEE mains examinations could fetch you a top rank but a 70% score in board examinations is considered a poor result.
It is the same with your investments. You may consider a 15% return to be great, but if the comparable index gave 20% return then it is a poor return. Hence, always compare against a benchmark index. A small-cap, mid-cap or large-cap mutual fund should be compared with the appropriate index like NIFTY and SENSEX. If the fund is performing worse than index, then you should dig deeper. It may well be a fund that is ultra-conservative and is less volatile. The decision to keep the fund in portfolio should depend upon the goal that fund serves in your portfolio. For mutual funds, I have created my methodology to evaluate them. If you want, you can read it here and download the excel for a sample of funds.
2. Expected return vs real return:
Remember when you were taking part in a competition or sports match, you had some expectation before the start. The reality at the end would be different, it might be good or bad. But one should keep measuring how far is reality from expectation. Investments work similarly. You should keep monitoring real returns at regular intervals. And take necessary action basis the returns your portfolio is offering, vs your expectations with respect to the broader financial plan.
3. Maintain Asset allocation:
People usually have an asset allocation basis the stage of investment they are at. It may start as 80:20, equity vs debt, and change overtime.
Now, this allocation itself will change basis the returns you receive in equity and debt. For example, suppose you start with Rs. 20 Lakhs investment and invest 80% or Rs. 16 lakhs in equity and 20% or Rs. 4 Lakhs in debt. After an year, let’s say equity market yield 20% and debt yields 10%. Hence, after 1 year you will have Rs. 19.2 Lakhs in equity and Rs. 4.4 Lakhs in debt. Your allocation now becomes 81.35% equity and 18.65% debt. In order to bring it back to 80:20, you would need to withdraw 1.35% from equity and invest in debt.
4. Have patience and stay invested:
Investment is not a 1 or 2 year sprint, hell it is not even a 5 year run. You need to stay invested for at least 7-10 years to make sure expectation and reality are close. You may want to read my post on why long term is best for equity to understand how there is less volatility in longer term.
That is all friends on how to review investment portfolio. If you liked the article, do comment below.