Importance of Regular Mutual Fund Portfolio Review
The motive behind investing is to build wealth and fulfil financial needs. As investors, we approach the world of investing with caution and a desire to build a solid financial future. Investing in mutual funds can be an excellent way to build wealth and fulfil financial needs. While the journey of building wealth through mutual funds is rewarding, it can be a bit complex for beginners as it requires extensive time and effort.
Most of us are aware of the general procedure of investing in mutual funds, which entails assessing financial needs and risk profile on the basis of which one can determine the horizon and asset allocation. Through this, you can carefully draft a diversified mutual fund portfolio. However, the journey doesn't end here. Once the portfolio is built, it is essential to review it periodically in order to ensure that you are on track to fulfil your financial needs.
In essence, portfolio review refers to the systematic evaluation of your investments in your mutual fund portfolio. Moreover, portfolio reviews are an essential tool for managing risk, optimising tax efficiency, reviewing the suitability of schemes, and adapting to changing circumstances.
The primary objective behind portfolio review is to ensure that the portfolio's composition aligns with your risk profile and financial needs. By conducting regular portfolio reviews, you can ascertain whether the existing asset allocation is still appropriate and make adjustments if necessary. Maintaining a timely review of your investment portfolio is of utmost importance for attaining stable returns and working towards your financial needs, especially during different market phases.
The frequency of portfolio reviews may vary depending on individual needs. Generally, performing a review every six months or at least annually is recommended. However, it is important to note that portfolio reviews do not always necessitate buying or selling investments. The purpose of a review is to take a holistic approach, considering various factors such as changes in risk profile, personal needs, and long-term performance of the portfolio rather than making hasty decisions based solely on short-term underperformance.
Regular portfolio reviews play a critical role in optimising investment outcomes. By diligently evaluating your portfolio, you can ensure that it remains aligned with your financial needs and adapt to the changing market conditions. Implementing a disciplined approach to review and rebalancing will help you to make informed decisions, mitigate risks, and make the most of your invested capital.
The need for the portfolio review arises due to the following reasons:
- Optimise asset allocation - Asset allocation refers to the proportion of the portfolio divided into different asset classes. For instance, consider an investor who is risk-averse and aims to maintain a 60 to 40 ratio between debt and equity. The following year, the markets experienced a bull run due to which his portfolio's asset allocation had changed to 45:55. To stay in line with the risk profile, the investor can opt to change the asset allocation when he reviews the portfolio to maintain a ratio of 60 to 40.
- Tailor portfolio based on personal preferences - As your financial journey progresses, your needs might change due to various factors, such as changes in lifestyle standards, marital status, and financial dependents. These shifts may necessitate the addition, modification, or elimination of certain needs from your financial plan. Hence, a periodic portfolio review can help the investor implement these changes.
- Replace underperforming schemes - Through portfolio review, one can identify schemes in the portfolio that have consistently underperformed. Identifying such schemes that have exhibited prolonged underperformance or subjected the investor to an inappropriate risk level becomes possible through a comprehensive review process. By recognising these underperforming schemes, the investor can change the underlying schemes in the mutual fund portfolio. This adjustment would allow the investor to earn risk-adjusted returns and effectively progress towards fulfilling financial needs.
- Tax efficiency - Through regular reviews, investors can ensure the tax efficiency of their portfolio. Incorporating a thorough portfolio review can reveal opportunities to adjust investments, resulting in potential reductions in tax liabilities. Investors may not be fully aware of the advantages associated with tax loss harvesting, which can effectively minimise the recognition of taxable gains. In such a case, a mutual fund distributor can guide the investor during the portfolio review to make the best decisions and maintain tax efficiency.
- Capitalising on market cyclicity - Regular portfolio reviews present an opportunity to capitalise on market dynamics and optimise investment outcomes. For instance, if there is an expectation of a favourable equity market performance, portfolio rebalancing can be executed to increase the allocation towards equity funds. Conversely, during a projected bearish phase in the equity markets, adjusting the portfolio to allocate a higher proportion to debt funds can be advantageous. These decisions, driven by regular portfolio reviews, enable investors to proactively adapt their asset allocation based on the market outlook, potentially enhancing overall portfolio performance. However, it is important to leverage the guidance of a mutual fund distributor to capitalise on the market cyclicity.
To conclude, building a well-diversified mutual fund portfolio across various asset classes is merely the first step in the investment process. Despite careful selection, the future performance of investments remains uncertain due to the volatile nature of the market. Thus, conducting portfolio reviews is essential to ensure that investments align with desired outcomes. Regularly reviewing your portfolio empowers you to navigate your investment journey smoothly and strive towards fulfilling financial needs within the designated time frame.
Neglecting to review your portfolio poses risks and may hinder your ability to achieve optimal results. The volatile nature of financial markets necessitates a proactive approach to managing your investments. Through diligent portfolio reviews, you gain insights into the performance of your mutual fund investments, identify areas for improvement, and take corrective actions as needed. This process enhances the likelihood of successfully fulfilling your financial need and helps you stay on track even during highly volatile markets.