De-Clutter Your Mutual Funds Portfolio In 5 Steps

A good mutual fund portfolio is one that is aligned with your goals, objective, and risk appetite. However, it is not always possible to keep a close watch on your portfolio every day of the year. Just as your closet needs re-arranging once or twice a year, your mutual fund portfolio too might need re-arranging.

Well, there are various reasons such as;

1. Your objectives and goals may have changed slightly, which needs to reflect in your portfolio.
2. You may now have a different risk-tolerance level that might impact your investment decisions.
3. Some of your investments may have deviated from their original strategy, which may not be to your liking.
4. There might have been a change in your approach or investment strategy which you might want to include in your portfolio.
5. You might not be getting the returns that you expected.

A well-organised portfolio with appropriate holdings is not only easier to manage but can yield optimum returns to meet future financial goals. Here is a step-by-step approach to clean-up the tangled mess in your investment portfolio.

1. Link Investment with Financial Goals Begin by broadly examining your entire investment portfolio and then carefully scrutinising each holding after factoring in its specific objective. Some schemes could be long-term (capital appreciation, retirement) while others could be aimed at shorter financial targets such as a child’s education, or buying a house. It’s important to remember that every investment must have a purpose that is consistent with your financial aspirations, risk tolerance, and time horizon.
2. Re-check Your Asset Allocation Strategy Your investment portfolio may comprise an assortment of financial securities in various asset classes. Given the unpredictable environment of the stock market, chances are your asset allocation strategy may not be in sync with your financial goals, risk appetite, and time frame.During the cleaning process check the asset mix of your portfolio and take corrective measures if needed. For example, an equity scheme is more suitable for the long term whereas the less volatile debt component is ideal for a shorter tenure.
3. Consider Rebalancing the Portfolio The overall asset allocation of your portfolio based on your risk tolerance can stray over time due to the market dynamics. Some of the mutual funds may outperform others which can make your portfolio either too aggressive or conservative. Rebalancing the portfolio with a few tweaks is a good idea to minimise the potential risk.The technique involves reviewing the equity-debt mix and re-arranging investments by moving money around (either by selling or buying holdings) to restore the portfolio to its strategic asset allocation.  Financial experts recommend rebalancing of portfolios once a year or whenever the portfolio drifts too far from the original allocation track.
4. Inject Different Asset Classes Are your current portfolio constituents running parallel to your investment goals, and delivering positive returns? An assessment may reveal funds that have deviated from their investment objective.  These need to be discarded as they will disappoint. Also, some of the holdings that have performed well in the past in all market conditions may not match their benchmark indices.In such a scenario, it may be time to cut losses and replace stocks that are not panning out consistently with better performing funds. Liquidity is important too. If your portfolio has a concentration of long-term options, it makes sense to create symmetry by increasing liquid and short-term investments for emergencies and unforeseen contingencies.
5. Minimalistic Approach: You may have heard the popular adage "too much of anything is bad"! Well, this is also applicable to the mutual fund space. While, experts generally recommend diversification of investments to mitigate risks, managing too many schemes can be an uphill task requiring time and proficiency. A focused portfolio is known to perform well.The key is to embrace the minimalistic approach and invest in a few quality funds that promise satisfactory returns you desire. So how many mutual funds should you have?Your portfolio should preferably include four to five equity funds, two large caps, and two multi caps.

What say, ready to give your mutual fund portfolio a good shake-up? If the cleaning process sounds intimidating, it’s best to consult a financial planner to review your asset allocation carefully.  Armed with experience and skill and knowledge in the domain, he can help untangle the mess by dumping laggards, cutting tax liabilities, and restructuring your investments so that they are in tip-top shape for wealth creation.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.