While looking at the problems, think about your portfolio as a whole, not simply as a collection of individual investments. The reason for a disfigured shape of your portfolio is not difficult to understand. In most of the cases, it happens because of the noise built around the launch of an investment or based on the short-term suitability of an investment product.Not defining objectives and priorities

After owning an investment product for a long time, it is easy to forget that the funds in your portfolio are there to do a job. Take your time to think about what that job is, and whether your needs or expectations for that investment have changed. It may be time you sold some of thosefunds.

Lack of focus

If you find yourself staring at a long list of funds and many millionaire and Lakhpati bonds and are not really sure why you own them, your portfolio probably lacks focus. For each goal that you have identified, you should have a core group of three or four funds that are proven performers. The bulk of your assets -- typically 70 per cent to 80 per cent -- should be in these investments. For most people, large-cap funds will probably make up the core of their portfolios. Simplify by focusing on a few funds that can deliver what you want and gradually add to your investment in them rather than adding more funds to your lineup.

Putting too much outside the core funds

Use additional funds for diversification and growth potential. For instance, if your core is made up of large-cap funds, you might want to add a small-cap and sector funds for diversification. While you probably would not want to put a significant portion of your portfolio in any one of these types offunds, they do allow for the possibility of extraordinary returns. They also generally carry a higher level of risk. But as long as you limit the more-risky portion of your portfolio, you are not likely to threaten the bulk of your nest egg. For some , core funds may be all they ever need.

Imbalance

A well-constructed portfolio is a balanced portfolio. If you see something that stands out, you need to determine whether it still fits your risk profile. Imbalance happens when some categories do very well or very poorly.

A portfolio that was balanced three years ago would be totally out of shape today if it has not been re-balanced. If you had invested 25 per cent of your portfolio in intermediate-term bond funds and 75 per cent in stocks, your allocation today would be starkly different: Just 13 per cent in intermediate-term bond funds and a whopping 87 per cent in stocks. That portfolio is much riskier today than it used to be.

Owning too many funds

Perhaps you own five ELSS funds (taxsaving equity funds) besides Morgan Stanley, Mastershare, Mastergain, etc. Many investors know they have this problem -- they just do not know what to do about it. Start by evaluating where the fund fits into your portfolio. Is it a core fund or not? It is critical that your core funds be strong performers, so if they lag behind their peers for three years, make a change. Try increasing the assets in your core funds and cutting out a few of the poorer-performing non-core funds.

Poor choices within fund categories

Evaluate your portfolio's performance at least once a year, comparing your funds' risk and returns against those of their peers. If a fund has not kept up with its peer group over the past three years, it is time dropped it. There are occasions when the absolute return from a fund may not drive you to sell it, but looking at its performance objectively might reveal that the fund owes it entirely to the market and adds no value.

Paying too much

Given two similar funds, I wouldtake the one with lower costs. Avoid a fund with a high load. This becomes all the more important if you have chosen systematic investment plan in an equity fund. The prospective return from a fund is always uncertain but the load is definitely reduces your capital.

And the compound effect of this recurring cost could significantly reduce your returns over a longer time frame. Besides load, also keep an eye on the fund's recurring expenses. Over time, the difference in performance between a fund with a 0.5 per cent expense ratio and a 2 per cent expense ratio can be dramatic. For example, if you invested Rs 10,000 in a fund that gained 12 per cent per year before expenses and carried a 0.5 per cent expense ratio. And your friend invested Rs 10,000 in a fund that also gained 12 per cent per year before expenses, but his fund carried a 2 per cent expense ratio. Twenty-five years later, you would have nearly Rs 45,000 more than your friend, simply because your fund's annual fees were lower. Whatever be theperformance story -- costs matter.

Excessive stock overlap

I've seen many cases where someone owns a significant amount worth of bluechip stocks and mutual funds that also own that same stock. There's nothing wrong with holding bluechip stock, but do balance that investment with diversification in the rest of your portfolio.

Value Research