What’s a portfolio review?

Reviewing your investment portfolio is one of the most crucial steps in managing your money. Because creating a portfolio is just one part of the story, the bigger challenge is to put in place a mechanism for continuously reviewing the portfolio and making changes where required. Portfolio review is not akin to portfolio rebalancing. In portfolio review, you just review the portfolio on some set parameters like asset allocation, risk mitigation, overweight or underweight on sector or theme etc. This may or may not result in rebalancing. The objective of review is just to satisfy yourself that you are on target to reach your goals and the milestones are in order.

Why is it so important?

Because Investment is constantly evolving things and we need to monitor our portfolio with current trend. 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 revisit and look for alternatives.

Why is Rebalancing important for you ?

Portfolio Rebalancing involves modification of asset allocation within a portfolio. This is done since each investment’s value can fluctuate because of the constantly changing economy. The central aspect of portfolio rebalancing is asset allocation and how much money does an investor allocate to certain “asset classes” within the portfolio.

In simple terms, portfolio rebalancing uses a weighted average method to determine asset allocation in the portfolio. Rebalancing mainly involves regular purchase or sale of assets to maintain the desired amount of asset allocation within certain risk limits.

Let’s take an example to better understand portfolio rebalancing.

Vedika prefers to have 50% stocks and 50% bonds as an asset allocation in her portfolio. If stocks performed well through the period, the value of the stocks in her portfolio may increase. She can then sell some stocks and invest some of the profits/proceeds in bonds to ensure that the portfolio construct remains as per her 50/50 target in the long run.

When should an investor rebalance a portfolio?

Most investors design their investment strategies for the long-term. However, there can be situations when they need to reconsider the portfolio composition and opt for rebalancing. Here are some of the examples which show that it is the right time to rebalance a portfolio:

  • Changes in risk tolerance levels of the investor
  • Nearing or the arrival of a financial goal
  • An investor nearing retirement
  • Sudden Market Movement
  • Tax Changes
  • Outperformance or underperformance of asset class
  • Windfall gain… etc.

Rebalancing of a portfolio can be done to restore the asset allocation as per changes in investment goals, investment timelines, and risk tolerance levels. While doing so, it is important to remember that changing asset allocation does not always guarantee higher yields or protection against possible future losses.

How can you rebalance your portfolio?

When you invest in mutual funds, you are investing to achieve a single goal via various vehicles. So when you rebalance, the shift must occur across all of these funds at the same time.

Here’s how you can rebalance your portfolio in 5 simple steps:

Step 1: Primarily, have an asset allocation plan by considering your income, the expected time of retirement, and so on. Create an asset allocation framework, but if you are unsure speak to an expert – ASNANI'S MUTUAL FUNDS can be of help here.

Step 2: Assess your current asset allocation by identifying where and how your current investments are placed in stocks, cash, bonds, or any other form of investment. After this, make a comparative analysis of asset allocation target and its present state and make adjustments accordingly.

Step 3: Chart out a rebalancing plan is your asset allocation target does not align with your current portfolio. This step can be tricky where you have to decide on the securities to retain and in what numbers. Speak to our experts at ASNANI'S MUTUAL FUNDS to get clarity.

Step 4: Be mindful of the tax implications, especially on capital gains. Avoid the short term taxes on capital gains by holding on to your equities for over a year. In the case of debt funds, the short-term capital gains will qualify for taxes based on the individuals’ income tax slab. For long-term capital gains, the tax is 20% with indexation. If you need to scale back, aim to sell the securities in the tax-exempt accounts first. In this way, you can limit the taxes you pay in capital gains.

Step 5: Review your portfolio at least once a year or maybe once in six months to assess your position but rebalance it only when you feel that the allocations are significantly out of the track to reaching the target.

What is a Portfolio Revamp?

All this made it increasingly difficult for investors to navigate through the maze of funds and identify the right ones for their needs.

To simplify the process of selection of appropriate schemes and to help investors make more informed decisions, the Securities and Exchange Board of India came up with a new system of fund classification.

The new system aims to bring uniformity in the schemes, thereby facilitating scheme comparison across fund houses.

Based on the categories that have been defined by SEBI, Mutual Funds have been forced to revisit their entire universe of offerings, and decide which schemes to keep, which to merge, and which to wind down or change the fundamental attributes of.

This move could, therefore, have significant impact on investors' portfolios, forcing them to make suitable changes to them.

According to the new classification, all open-end mutual fund schemes will be placed under the following categories: Equity, Debt, Hybrid, solution-oriented, and others (Index Funds, ETFs, and fund of funds).

Only one scheme will be permitted in each category, except in the case of index funds/ETFs, fund of funds, and sectoral/thematic funds.

Effect on your portfolio

  • The fundamental attributes of a fund that you hold may change.

  • You need to understand if after the change the fund fits your needs.

  • Selling a fund could give rise to tax impact and exit load, which you should try to minimise.

  • Outperformance may decrease as fund managers will have to stick to a strictly defined universe of stocks, forcing you to consider passive funds as an option in some categories.