Assessing Your Investment Strategy: A Guide
Simplifying Your Investment Portfolio Review: A Step-by-Step Guide
Managing your investment portfolio can be a daunting task, but with a systematic approach, it becomes more manageable. Here's a guide to help you review your portfolio effectively.
Step 1: Organize Your Financial Assets
To streamline the portfolio review process, it is recommended to compile all your financial assets in a spreadsheet. This includes Fixed Deposits (FDs), gold, debt funds, Public Provident Fund (PPF), Employee Provident Fund (EPF), and Equity Funds, which are further categorised into segments such as Large Cap, Mid Cap, Small Cap, and International Funds.
Step 2: Set Expectations for Your Portfolio's Performance
Establishing performance expectations for your portfolio is crucial. This can be achieved using a simple risk profile-based thumb rule or the 'inflation + X method'. For instance, you might aim for a 4, 5, 6, or 7% premium over the long-term inflation rate.
Step 3: Assess the Portfolio's Returns
Calculate the portfolio's returns by preparing a single percentage representing the portfolio's growth over a specific period. In our case, the actual returns of the year for the portfolio were 8.2%.
Step 4: Divide the Portfolio for Better Management
Your portfolio is divided into a core portfolio and a satellite portfolio for efficient management. The core portfolio consists of assets that will cater to your financial needs for the next 5, 10, or even 20 years. The satellite portfolio, on the other hand, is for experimentation or taking on a slightly higher risk than the core portfolio.
Step 5: Analyze Recent Performance and Momentum
Incorporate both price momentum and fundamental momentum into your review. Assess recent stock price performance over the past 12 months and assign a momentum score (e.g., +1 if performance >5%, -1 if <5%). Also, factor in fundamental metrics like changes in earnings per share (EPS) to assign qualitative scores to stocks. This helps prioritize stocks for further analysis and decisions about adding or trimming positions.
Step 6: Evaluate Current Asset Allocation vs Target Allocation
Review your portfolio’s current asset allocation (equities, bonds, sectors, etc.) and compare it with your planned or target allocation aligned with your financial goals. Identify any deviations or concentration risks that require corrective action. Use portfolio tracking tools if available to quantify shares or amounts to buy or sell for rebalancing.
Step 7: Consider Tax Implications and Transaction Costs
Before making any trades, factor in the tax impact, such as short-term capital gains for assets held less than a year, exit loads, and transaction fees. This ensures that rebalancing decisions enhance net returns and avoid unnecessary costs.
Step 8: Develop an Action Plan and Seek Expert Advice if Needed
Based on your analysis from steps 5 to 7, create a plan to rebalance your portfolio gradually, possibly using systematic investment or transfer plans (SIPs/STPs) to adjust asset weights without disrupting your long-term investment strategy. If uncertain about timing or fund selection, consult with a financial advisor for personalized recommendations.
By following these steps, you can ensure your portfolio stays aligned with your goals and risk tolerance, while also keeping performance in line with expectations. This process opens up financial opportunities that were previously hidden, making your investment journey more rewarding.
- To optimize your investment strategy, consider diversifying your portfolio by including mutual funds, such as debt funds, equity funds, and fixed deposits (FDs), in addition to traditional assets.
- In the pursuit of personal-finance growth, it's important to regularly assess the allocation of mutual funds in your portfolio, ensuring they are aligned with your risk profile and financial goals.
- When evaluating potential mutual fund investments, make sure to consider both their historical performance and the feasibility of achieving your long-term financial objectives while taking into account tax implications and transaction costs.
