5 steps to clean up your investment portfolio and meet financial goals

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New Delhi | Updated: September 23, 2018 8:56:34 AM

Financial planners and customer-friendly online financial marketplaces have simplified the investment and financial planning process for consumers.

investment portfolio management, investment portfolio meaning, financial goals, The first step towards cleaning up your portfolio is to review instruments and funds.

Financial planners and customer-friendly online financial marketplaces have simplified the investment and financial planning process for consumers. However, despite their rising popularity, many investors still end up goofing up their investment portfolios. For such investors, I provide a 5-step guide to help clean up their investment portfolio:

Step 1: Revisit financial goals and current investment portfolio

The first step towards cleaning up your portfolio is to review instruments and funds wherein you have invested till date, and find out if they can help achieve your financial goal. Sometimes, we invest in instruments suggested by our friends or family, simply driven by emotions rather than tactics. These may prove to be inadequate to meet our financial goals. There may also be some investments which did make sense in the past but aren’t relevant today.

Reviewing your portfolio would help evaluate the relevance of your past investments as per your short-term and long-term financial goals.

Step 2: Chalk out the junk to trim down your portfolio

Trim down your investment portfolio once you identify investments which no longer cater to your financial goals. This may include funds that have been consistently under-performing for over 2-3 years in a row. Redeem your units from such funds and invest in better-performing funds instead.

In addition to this, find out whether you invested in a wrong or unwanted fund while diversifying your portfolio. The basic idea behind diversification should be to prevent any damage to your portfolio in the event of an economic slump or under performance/failure of one kind of security.

Many investors decide the type of diversification (whether it’s across or within an asset class, or based upon fund management or geographical location) without taking into consideration factors such as their risk appetite, investment horizon, market knowledge, financial goals etc. This practice often leads to creation of an unsuitable portfolio which neither matches the investor’s financial goals nor assists in wealth creation.

Also, try to understand the difference between diversification and duplication. Duplication takes place when the chosen schemes/securities do not reduce the overall risk of the portfolio and continue providing just average returns.

Step 3: Restructure your portfolio in accordance with your financial goals

Your portfolio would require restructuring in order to get back on track. Whether it’s a short-term goal such as family vacation and purchase of electronic gadgets, or a long-term goal such as child’s higher education and marriage, each goal would require a separate investment. Your portfolio should ideally have a mix of funds to cater to both short as well long-term goals.

Choose appropriate investment avenues as per your risk appetite, investment horizon, age etc. But before finalizing this, make sure your financial goals have been prioritized and the corpus’ amount has been estimated.

If you are a risk-averse investor, consider investing in high-yielding savings accounts or fixed deposits for short or medium-term goals. Moderate risk takers can invest in debt mutual funds for achieving short to medium term goals.

As far as long-term goals are concerned, equity mutual funds have proven to be most suitable investment avenue, given that they provide consistent as well as inflation beating returns in the long run, especially when compared to traditional investments such as NSC, MIS or PPF. Consider investing in balanced fund in case you want to avoid taking the risk of investing purely in equities.

Step 4: Review your portfolio periodically

Even after investing in the suitable investment avenues, you must keep reviewing your portfolio from time to time, ideally at least once a year. Periodic reviews help in assuring you’re your investments are aligned with your financial goals and the funds are performing satisfactorily in comparison to benchmark indices and peer funds.

Restructure or re-balance your portfolio in case you feel your current investments may not be adequate to meet your goals.

Step 5: Learn from your mistakes to avoid future mess-ups

While the aforementioned measures would help you clean up your portfolio, it’s up to you to ensure you do not repeat the same mistakes in future. One effective way to do so is to be aware of the decision points which went wrong in the past and learn from it. This would help maintain healthy portfolio that’s in sync with your short-term and long-term financial goals.

(By Manish Kothari, Director & Head of Mutual Funds, Paisabazaar.com)

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