Wealth  Management  Services

Reviewing Your Investment Portfolio

August 20, 2020

Investing in mutual funds is not a one-time process. It’s like driving a car.

You either ask someone else to drive it, put it on auto-pilot or drive it yourself. But vigilance is necessary to keep it on track.

Now a lot of investors are confused between the terms rebalancing and optimizing – both of which apply to a mutual fund portfolio. Let’s clear that firstly.


Remember the asset allocation story you’ve heard and read so many times? That you should have a fixed asset allocation according to your investment goals, risk appetite etc.

Rebalancing basically refers to adjusting the debt and equity exposure your portfolio is supposed to have.

Rebalancing ensures that your portfolio does not become overly dependent on either the success or failure of any one investment or asset class at any given time. You should monitor the performance of your portfolio and restore its original balance at least once every year.

For Instance –

You start with a 50:50 exposure to equity and debt.

You earn the expected return of 6% on debt and 12% on equity components of the portfolio.

A quick calculation tells us that now the portfolio has 51.3% equity portion and 48.7% debt portion.

As a corrective action, you invest more money such that the ratio is reverted to 50:50 or probably just transfer some money from the equity portion to the debt portion for the same result.

This is called rebalancing.



Now, your debt and equity portfolio consist of some securities.

In our discussion’s context, you hold some equity mutual funds under the equity component and some debt mutual funds under the debt component.

These specific mutual funds are responsible for the returns you earn. But what to do when the specific mutual funds start underperforming?

It’s like a component of your car has been exposed to a lot of wear and tear or has simply stopped working as it was supposed to. What do you do?

Well, if it is a car you always have the option to repair it from a professional. But a mutual fund is not yours – to a great extent your money is at the mercy of the fund house and fund manager. So, you cannot repair your mutual fund holdings.

What’s the other option? Replace it!

The great thing about investing in mutual funds is that you have a lot of options – in general and among categories too. There are around 45 fund houses so you can have up to 45 choices of large cap funds, 45 choices of mid cap funds etc.

So, if one of your mutual fund holdings starts underperforming you can simply replace it with another mutual fund.

This is the topic of the blog and we are going to explore more on the argument of whether portfolio optimization helps – what should be the frequency of portfolio optimization and if it does helps, then to what extent so that we know if the effort it is worth it. 

Does mutual fund portfolio optimization help?

Yes, a Lot. Let me tell you why-

1. Avoids Portfolio overlap
This is one of the most common mistakes that happen with not so savvy investors. There are a lot of funds in the market which appears to be different but inside hold exactly the same stocks. Especially when it comes to large-cap funds and index funds, this occurring is much common. Investors generally buy funds going by their name and not actually following all the holdings they possess. This directly affects the risk on your portfolio, if your hold 2 funds with same or similar performing stocks, your risk gets exactly doubled during a market correction.

2. Taxes
If you are well-versed with the investments you have made and know their tax benefits, they will come handy to you while your file your taxes and income tax return. If saving taxes comes early on your financial plan, you need to select only or most of those funds which offer tax benefits. It will also give you an idea where more you can invest to save maximum on taxes.

3. Identify investments mistakes if any
If you are not a seasoned investor, there are likely chances that you might have committed some mistakes in choosing the right funds. if your major concern is liquidity and your portfolio shows an inclination towards large-cap funds, it is a mismatch or if you are risk-averse and have invested generously in small-cap funds, you need to review your investments. Such mistakes which affect your ultimate financial objective need to be rectified as soon as possible or they can cause permanent damage.

Fine, I’ll review but how often do you want me to optimize?

If you think the answer is ‘whenever the fund starts giving less returns’, you are missing the point.

There are many instances when a fund scheme yields less than expected returns. And the reasons behind these in most instances apply to all the funds. So, there is a good chance that you will see all funds of a category underperform for a period simultaneously.

Another approach is to review at a certain frequency. This review will ask you to either change the fund or continue with the fund. This implies you are always invested in one of the best funds in the respective category.

So, what are the frequencies one can explore?

1 month is too short. And requires vigilance beyond imagination of the average investor.

5 years is too long. Your fund might have started underperforming well before you review.

Basis these arguments, we propose the following frequencies be explored –

  1. Optimize once a year
  2. Optimize once in three years

This is because, based on our observations, optimizing (either every year or every 3 years) is more effective than never optimizing.

The bottom line

Hope we now understand when we should consider a review of our financial portfolios. it is crucial to successful investing that you review your investment portfolio at least on a yearly basis. This will not only help you to keep up with the market trends and movements but also help you to locate and rectify any mistakes you have made by an impulsive action.

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