Should I change my investment portfolio strategy?

Ans: Your dedication to consistent investing over the years is commendable. Having invested in SIPs and lump sum since 2012 and 2014, you have built a solid foundation for your financial future. However, periodic review and correction of your portfolio is essential to ensure alignment with your long-term financial goals and risk tolerance. Let's dive into your investment portfolio and explore if any adjustments are necessary.

Assessing Your Current Portfolio
Diverse Fund Selection: Your current portfolio includes investments in SIP and lump sum across different funds. This shows a good attempt at diversification.

Long-Term Investment Horizon: You've been investing since 2012 and 2014, which reflects your long-term commitment. Equity investments tend to perform better over longer periods, so your approach is sound.

Growth Focus: The funds you’ve chosen focus on growth, which aligns well with long-term wealth creation.

Potential Issues in Your Portfolio
1. Overlapping Investments
Duplication Across Funds: There could be an overlap in the underlying stocks within your selected funds. This reduces the effectiveness of diversification.

Risk of Concentration: If multiple funds invest heavily in the same sectors or companies, your portfolio may become concentrated in a few areas, increasing risk.

Portfolio Overlap Analysis: Conducting an overlap analysis with the help of a Certified Financial Planner can help identify and reduce redundancy.

2. Fund Performance Evaluation
Performance Consistency: Evaluate the performance of your funds over the years. While some funds may have performed well in the past, their recent performance might not be as strong.

Benchmark Comparison: Compare your funds' performance against their respective benchmarks and peer group. This will give you an idea of whether your funds are underperforming or outperforming.

Review of Fund Manager: The performance of a mutual fund is often influenced by the fund manager. If there have been changes in management, it may impact the fund's strategy and performance.

3. Rebalancing for Risk Management
Risk Tolerance Alignment: As you grow older or as market conditions change, your risk tolerance might shift. It’s essential to rebalance your portfolio to reflect your current risk appetite.

Asset Allocation Check: Ensure that your portfolio's asset allocation aligns with your financial goals and risk tolerance. Over time, certain funds may have grown disproportionately, leading to a skewed allocation.

Debt Allocation: Consider whether you need to increase your allocation to debt instruments for stability. If you are nearing retirement or have significant financial goals approaching, a more conservative allocation might be prudent.

Benefits of Portfolio Correction
1. Optimizing Returns
Active Management Advantage: Actively managed funds can potentially offer better returns than index funds, especially in a volatile market. Fund managers actively make decisions to outperform benchmarks.

Tactical Adjustments: By correcting your portfolio, you can take advantage of market conditions and optimize your returns.

Tax Efficiency: Correcting your portfolio can also involve tax-efficient strategies like booking profits in a phased manner to avoid higher tax brackets.

2. Minimizing Risks
Diversification Benefits: Correcting your portfolio can reduce concentration risk by diversifying across sectors, asset classes, and investment styles.

Volatility Management: A well-balanced portfolio correction can help manage volatility, ensuring that your investments do not fluctuate too widely in value.

Liquidity Consideration: Ensure that a portion of your portfolio remains liquid. This is crucial for emergencies or unexpected opportunities.

Steps to Correct Your Portfolio
1. Conduct a Portfolio Review
Comprehensive Analysis: Start with a detailed review of your current investments. Assess their performance, risk, and alignment with your goals.

Professional Guidance: Engage a Certified Financial Planner to assist with this review. Their expertise can help in identifying areas that need correction.

Objective Setting: Clearly define your financial objectives. This will guide your investment strategy and help in making necessary adjustments.

2. Reduce Overlap and Diversify
Trim Redundancies: Identify and reduce overlapping investments. This might involve switching out funds that have similar holdings or strategies.

Diversify Across Sectors: Ensure that your portfolio is diversified across different sectors and asset classes. This reduces risk and increases the potential for stable returns.

Geographic Diversification: Consider adding international funds if your portfolio is heavily invested in domestic markets. This adds a layer of diversification by spreading risk across different economies.

3. Rebalance Asset Allocation
Regular Rebalancing: Rebalance your portfolio at least annually to maintain your desired asset allocation. This might involve selling some equity funds and investing more in debt or vice versa.

Age and Goals Consideration: Adjust your asset allocation based on your age, financial goals, and risk tolerance. Younger investors can afford more equity exposure, while older investors might prefer more stable debt instruments.

Systematic Investment Adjustments: Instead of making lump sum changes, consider a systematic approach. This involves gradually moving your investments to align with your desired asset allocation.

4. Consider the Tax Implications
Tax Harvesting: While correcting your portfolio, be mindful of the tax implications. Use tax harvesting strategies to minimize your tax liability.

Long-Term Capital Gains (LTCG) Management: If your investments have appreciated significantly, plan your portfolio correction in a way that manages LTCG effectively.

Tax-Efficient Fund Selection: Choose funds that offer tax efficiency, such as those that align with your financial year planning.

Final Insights
Active Monitoring: Actively monitor your portfolio, even after making corrections. Regular reviews ensure that your investments continue to align with your goals.

Stay Invested: While correcting your portfolio, stay invested. Avoid the temptation to time the market, as this can lead to missed opportunities and increased risk.

Seek Professional Advice: The role of a Certified Financial Planner is crucial in this process. They can provide personalized advice tailored to your specific situation, ensuring that your portfolio is optimized for your needs.

Long-Term Focus: Keep your focus on long-term wealth creation. Short-term market fluctuations should not deter you from your investment strategy.

Flexibility and Adaptability: Be flexible in your approach. As your financial goals evolve, so should your investment strategy. Adapt your portfolio to meet your changing needs and risk tolerance.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in