Investment planning is an ongoing exercise. It begins with you, as an investor, assessing your risk profile and taking a closer look at the long-term and short-term needs that you wish to fulfill with the investments you choose. Then, based on the time horizon, your risk tolerance, and the kind of returns you’re after, you put together an investment portfolio that is sufficiently diversified. But does the whole investment planning exercise end there? Well, not quite. In fact, creating an investment portfolio may only just be the beginning.
After that is done, you need to perform a portfolio review at periodic intervals. Now, what is this review all about, and why should you, as an investor, do a periodic portfolio review? That’s just what you’ll find out here.
What is a portfolio review?
As the name indicates, portfolio review is the practice of assessing your investment strategy and checking on how the investments in your portfolio are performing. The goal is to verify if the performance is aligned with the returns you seek and the goals you wish to satisfy. By performing a periodic portfolio review, you can check if the initially planned asset allocation still holds true, and if it doesn’t, you can rebalance your portfolio to retain the intended asset allocation.
Why should an investor do a periodic portfolio review?
There are many reasons why investors must perform a portfolio review at regular intervals. If you’re unsure of the importance of this exercise, here’s a closer look at why you must review your investment portfolio periodically.
1. It helps you maintain the optimal asset allocation mix
Asset allocation is essentially the proportion in which you’ve allocated your total funds across different investments. For example, let’s say you wish to invest Rs. 1,00,000. Since you’re moderately risk tolerant, you decide to invest in equity and debt funds in the 50:50 ratio. Over the course of one year, the NAV of the funds will naturally fluctuate. And at the end of the year, say your portfolio’s asset allocation between debt and equity stands at 43:57. In that case, your original asset allocation no longer holds true. The equity component in your portfolio has increased.
This may not be in tune with your investor profile, and a periodic portfolio review can help you spot this. You can then rebalance your portfolio and bring the asset allocation mix to the optimum level once again.
Additional Read: Benefit of Asset Allocation in the Portfolio
2. It helps you align your investment portfolio with changing life goals
Typically, when you’re younger, you may be open to taking more investment risks in favor of the possibility of earning higher returns. Over time, however, your risk tolerance could drop, particularly as you get closer to retirement. Similarly, your life goals may also change over the years. A new goal may appear on the horizon, and you may need to shuffle your investment portfolio accordingly.
When you perform a portfolio review regularly, you get the opportunity to verify if the investments in your account are aligned with the goals that lie ahead of you. For example, say you invested in a debt-equity mix in the ratio of 40:60. Around 3 years later, your portfolio mix may have changed to 35:65. By that time, you wish to save up for your retirement more sincerely. So, following a portfolio review, you could reconstitute your portfolio to allocate more funds to the debt component, so you can earn steady returns over the years to create a retirement fund.
3. It allows you to take advantage of market movements
Reviewing your portfolio periodically also makes it possible for you to take advantage of market movements. For instance, if you expect the equity market to perform well in the foreseeable future, you could rebalance your portfolio to increase your equity funds weightage. Conversely, if you expect that the equity markets may enter a bearish phase, you could increase your investments in debt funds instead.
Additional Read: Post-pandemic portfolio management: What now?
In addition to the reasons discussed above, performing a portfolio review periodically will also be useful for tax planning, since you can adjust your investments in such a way that your overall tax burden could reduce, if need be. The exact frequency at which you’ll need to review your portfolio could vary, depending on your requirements and your investor profile. Ideally, try and perform a review every six months or every year.
To keep your portfolio aligned with your goals and expectations, there are many different kinds of funds that you can choose from. Tata Capital Wealth, for instance, offers you a choice of various equity, hybrid, debt, liquid, and tax saving funds, among others. With such a plethora of options available, you’ll find that rebalancing your portfolio after a review can be done more thoroughly.