Why you need to review your mutual fund portfolio
Every individual invests in mutual funds to earn returns and achieve financial goals. They do rigorous analysis to identify the most profitable mutual funds among the thousands of options available. Despite so much effort, most investors fail in their endeavours. So why do investors fail despite putting in so much effort? The main reason is most investors believe that their work ends once they have built a portfolio. They give less importance to periodic portfolio reviews, which are even more critical, primarily when one targets consistent returns to build wealth. Failing to keep a close eye on their investments inadvertently exposes them to unexpected situations affecting their financial objectives and risk profile. Investors need to keep in mind that just as the markets are dynamic even, they need to keep an eagle’s eye on their holdings. They should not just buy and forget stocks but also review their portfolio as and when required.
In simple words, a portfolio review assesses one’s existing investment strategy in terms of rate of return and risk. It involves breaking down and studying the investments made to determine their appropriateness concerning the investors’ needs, preferences and resources. By doing reviews, one must make sure whether their current investment pattern is adequate in terms of money invested in each asset, type etc.
Importance of portfolio review
When investors begin building their portfolio, they incorporate funds belonging to different industry or sector which matches their risk appetite and other factors. However, as the market is dynamic, some of the stocks or funds may perform well while others may not, and the portfolio may end up looking very different from where it started; here is where reviews act as timely warning signals and give us the opportunity to undertake correction at the right moment.
The reasons for portfolio review are many, but the most important ones are:
- It helps investors identify and eliminate non-performing investments as the earliest. Such investments fail to add value and end up degrading the overall portfolio’s returns.
- The financial goals of the investors keep changing. Factors like inflation change the standard of living, tax structure, the addition of dependence and others may compel investors to alter their final goals periodically.
- A portfolio review helps investors identify investment mistakes. This applies especially to novice investors who might need help choosing the right stocks for their portfolio.
- Investors should review their portfolios to ensure their money is well diversified across sectors or industries. This helps to minimize their exposure to any one sector or industry.
Questions to keep in mind while reviewing your portfolio
- Is your portfolio adequately diversified?
When evaluating the diversification of your investment portfolio, the following tips are to be kept in mind:
o Make sure you’re not over-exposed to any asset class.
o Consider investing in both domestic and international assets.
o Don’t forget about alternative investments such as real estate or commodities.
- Does my equity portfolio fit my overall financial plan?
It’s essential to take a holistic approach when creating a financial plan. This means looking at all aspects of your finances, including your equity portfolio.
For many investors, the equity portion of their portfolio is the largest and most important. But does this portfolio actually fit with their overall financial plan? If not, make some changes so that everything works together seamlessly.
- How is my portfolio performing versus the benchmark?
A portfolio is a collection of investments, and the performance of a portfolio is measured against a benchmark, an imaginary portfolio representing the performance of the market as a whole or a specific sector.
In order to create wealth in the long run, your portfolio must outperform the benchmark. If your portfolio outperforms the benchmark, it means that your investments are doing better than average. You are not creating wealth if your portfolio does not have a higher return than the benchmark.
- Are the returns adequate with the amount of risk you are taking?
As an investor, it is important to periodically review your portfolio to ensure that the risk level you take is appropriate for the return you desire. By assessing your current holdings, you can see if your investment strategy is still aligned with your goals. This process can also help you identify any prospective areas of concern which will help you make the necessary adjustments.
How often to review your portfolio?
Depending on individual circumstances, you may need to review as often as monthly, quarterly or even annually.
If you have a long-term investment horizon and are comfortable with more volatile asset classes, you may only need to check in once a year. If you have a shorter time frame or are less tolerant of risk, you’ll need to check in more frequently to ensure that your investments align with your goals. To grow your wealth, you’ll need to take a more brisk role in monitoring your investments. This means looking at your portfolio more frequently.
No matter how often you check in, the most important thing is to stay disciplined. Don’t make rash decisions based on short-term market movements. Maintain the course and stick to your long-term goals.
Portfolio reviews are not something that you should take lightly. On an ongoing basis, it is one of the golden rules for successful investment. It provides an opportunity to check in on how your investments are performing and ensure that you are still on track to reach your financial goals.
You can quickly review your mutual fund portfolio through our automated portfolio review tool. Check this detailed guide here.