Why you should review and modify your investment portfolio annually
Posted by: Arti Bhargava on Jan 29, 2018, 06.30 AM IST
Software professional Sanjana is a systematic investor in mutual funds. She has been investing in both equity and debt funds to meet her long-term financial goals. However, she wonders if she is saving enough. She wants to ensure that she will not fall short of funds for critical goals like the education of her two children. How can she monitor and review her portfolio and take corrective action before it is too late?
Sanjana is right in investing through SIPs for her long-term goals. However, adequacy of the investment for meeting a specific goal is determined both by the amount invested and the performance of the investment. To start with, fund selection is critical. The funds should, in the very least, do better than the benchmark index. Sanjana should ensure she has not chosen concentrated funds such as sector funds or riskier ones such as gilt funds for her SIPs. She is better off with a diversified equity fund and a dynamic bond fund that will be managed to make the most of opportunities in the market.
Sanjana should establish the value of her goal by using a simple assumption for inflation. The rate of return required should be such that will allow her investment to grow at a rate that beats the inflation. Otherwise, she will need to save more to reach the goal value. She has to define a minimum rate of return she needs per year and choose funds that will allow her to get that.
Next comes what she must do once she has selected the right fund and is investing the amount needed to reach her target. While reviewing the portfolio every year, if she finds that she has earned less than the desired rate, she could consider increasing her savings. This will ensure that the value of the investment is in line with the goal. For example, if she invested Rs 1 lakh each year and expects to achieve a return of 10%, the investment should be worth Rs 1.10 lakh when she reviews it. If it is lower, say Rs 1.05 lakh, she should invest a little more in the second year, to make up the shortfall. This way she will be able to top up her investment, or tone it down. The goal value can be achieved by modifying investments each year, in line with her targets.