Posted by: Arti Bhargava on Sep 11, 2017, 01.34 PM IST
Winneta is an involved investor with a large portfolio. She feels her asset selection has been good and she has managed risk well by investing small amounts in a large number of products. However, her portfolio is not generating good returns nor is it protected from volatility. Moreover, she has not been able to generate funds from her investments when she has needed it. Winneta wonders what she has done wrong and what more she can do to ensure that her financial goals are met.
A close look at Winneta’s portfolio reveals all the signs of over-diversification. Hers is a large portfolio of small, fragmented holdings. This means that the contribution of an investment that has generated good returns becomes insignificant in the portfolio. Costs and taxes eat up a chunk of returns too.
While Winneta has been diligent in evaluating the merit of each product before investing, has she considered her needs from the investments? Are her investments aligned to her horizon? Does she have excessive exposure to a particular type of investment, thereby increasing the risk of her portfolio?
Winneta has to take time to rework her portfolio so that it meets her requirements. First, she has to decide on the allocation to various asset classes. It has to suit her return requirements, risk profile and investment horizon. Next she has to categorise the investments she holds into these asset classes. By doing this, she will be able to determine what fits where in her scheme of things.
She may have to make additional investments in assets that she is under exposed to and to sell those she is over exposed to and bring her portfolio to the allocation that is suitable for her. And lastly, she has to consolidate her holdings into a few core investments that have been consistent performers.
Investments with narrow mandates, such as sector funds, investments that have a high cost and whose performance has not been consistently good are others that she should identify for selling.
She should exit them with minimal effect of charges and taxes on the value realised. Once Winneta completes this exercise, she will have a compact portfolio which will make it easy for her to monitor investments to make sure it is on track.