Saving and investment, especially in mutual funds, have significantly increased in the last few years. However, with a lack of experience and financial knowledge and without knowing the right place to invest in, most people just keep stacking up unnecessary schemes in their portfolios.
Having too many schemes could also make it difficult to monitor the portfolio of investors and could also dilute the overall portfolio returns.
Without proper guidance and knowledge, having multiple schemes could also lead to underperforming funds, not proper asset mix, as well as duplicate investments.
Here is how you could clean up your cluttered portfolio:
Get your financial goals straight
Start by listing each of your investments with a goal after factoring in their time horizon and inflation. Financial goals could include down payment required for buying a home or car or starting a business, a child’s higher education or marriage, post-retirement expenditures, etc.
You could also take the help of online SIP calculators to find out the monthly contribution required for each type of financial goal.
Asset allocation strategy
Investments need to be in sync with one’s risk appetite and time horizon. To do so one needs to have an asset allocation strategy – wherein his/her investments are distributed across various asset classes based on their time horizon and risk appetite.
For instance, with financial goals of more than 5 years, investment in equities should be considered, as they have the potential to outperform inflation and other asset classes over the long term, but should be avoided in the short term, as they are volatile in nature. For the short term, experts say, debt mutual funds could be considered by risk-averse investors for financial goals maturing within 3 years as they come with higher income certainty as well as capital protection than equities.
Take out underperforming funds
Sometimes well thought out funds could also consistently underperform their benchmark indices and peer funds. Industry experts say mutual fund schemes that have performed well in the past can also underperformers for a long time. Hence, look for under-performing funds and compare their performances with their peer funds. Get rid of the funds that have constantly underperformed their benchmark indices over the past 2-3 years.
Restructure your portfolio
Once you get a clear picture of your financial goals, set an asset allocation strategy, try to restructure your portfolio. Experts say there should be funds in an investor’s portfolio that matches their asset allocation strategy and financial goals. Having said that, avoid the mistake of over-diversification of your portfolio while restructuring, as that would complicate the tracking of funds.
Review at periodical intervals
At least once a year you need to review your portfolio. This way your could rebalance your investments if need be based on your risk appetite, financial goals, other macro-economic factors, etc. and keep your investments in line with your financial goals.