Source/Contribution by : NJ Publications
If you have been investing in Stocks, Bonds, FD's, Real Estate, Mutual Funds, etc., so by now you must be having a sizable investment portfolio. This investment portfolio of yours, as you all know, is the key to living a peaceful financial future. And since it is such an important component of your life that it has the ability to control your future prosperity, so it must be of utmost quality and should fit well into your requirements at all times. Hence, it becomes imperative that you do a quality check of your Portfolio regularly.
Yours have some unique preferences and constraints, and the portfolio should take care of them besides generating returns. The investment portfolio must stand true to:
1. Your Risk Appetite, the risk associated with your overall Portfolio should not be more than you can digest and
2. Time Horizon as per your goals: The point of having an investment portfolio is, it should be able to provide for all your life goals, so it is important that your investments are in alignment with your goals.
The general trend of investing is random; a small FD in one bank, another one in another bank, some stocks, some mutual fund investments, a piece of land, few gold coins, a PPF investment, few SIP's, and the like. This approach results in having a haphazard array of investments. So, the first step is to recollect and write down all the investments, asset class wise. Once you have a clear view of the entire Portfolio, the next thing to do is to ensure that it adheres to the above two points. It'll be ideal to seek help from a financial advisor for the process.
Before re balancing the Portfolio to arrive at your ideal asset allocation, it's important that you do a performance check of all the investments in your Portfolio. It's important to analyze the overall portfolio performance as well as the performance of all the components that make up the Portfolio. Also, you must note that all the investment products are different, carrying different levels of risk and hence offering different returns. So, you must not just sell off an investment just because it is giving lesser returns than another. It's important to do an Apple to Apple comparison, for example if a Mutual Fund investment is to be analyzed, it must be compared against it's benchmark and with funds in the same category, and not with other funds or products within your Portfolio.
Another point to note here is, the investment must be analyzed on the basis of a relevant investment period. For example, if you are evaluating an equity investment, a one year or three year return analysis will not give you a clear picture, it can be way to high or it can be exceptionally low. You must consider a period of at least more than five years while evaluating equity.
Does your Portfolio contain investments which you don't understand? Sometimes, investors tend to fall for the traps laid by investment agents, and they end up accumulating stuff which firstly, they don't understand and secondly, they don't need. So, if you are one such victim, it's time to get rid of them.
Does your Portfolio contain a traditional Endowment plan as well as a modern term plan? If Yes, you must do away with the traditional endowment plan, because of low sum assured, so it doesn't fulfill it's primary purpose of providing protection, and also which is being taken care of by the term plan; and secondly because of the meager returns it offers.
Is your Portfolio Over diversified? Too many investments causes clutter. You don't have to buy every new product that's launched in the market. Over diversification can be as bad as Under diversification. So, if your Portfolio is loaded with products, there is need to simplify it.
The investments under each asset class must be linked to a goal and must match with the time left for the goal to arrive. You must note that your asset allocation is not an isolated activity, it is also dependent upon your goals. The distance to your goals and the amount required also influences your risk appetite and your portfolio composition.
Your financial advisor will be of immense help to you in analysing, reshuffling and cleaning up your Portfolio, so that it conforms to your Risk Profile, your Goals and your Investment Horizon. It is very important to have a professional guiding you in your overall financial planning process, who will ensure that you take informed investing decisions, who will take care that your Portfolio doesn't lose track. So sit with your advisor and quality check your Portfolio. Also, Portfolio cleaning is not a one time activity, so do not miss the regular portfolio reviews with the advisor. It's ideal to check your Portfolio at least once a year, or on the happening of certain events like selling a property from the Portfolio, marriage, divorce, child birth, etc. It's like checking the progress of your dreams accomplishment.