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Importance of rebalancing investment portfolio

To maintain a healthy portfolio, it is important to identify and eliminate unsuitable elements in the portfolio, which may damage your overall returns. Financial Advisor Manikaran Singal explains why the process of rebalancing portfolio is important in order to achieve desired goal.

July 22, 2013 / 11:42 AM IST

In the process of detoxification of body the blood gets cleaned and toxins are processed for elimination. Similarly, detoxification of investment portfolio can be defined as a process of identifying and eliminating unsuitable elements in the portfolio, which may damage your overall returns, thus affecting the achievement goals. After all, good health is always a necessity be it physical or financial.

Why the need to detoxify your investment portfolio?

We are emotional:  We are always ready to help people near us like our friends, relatives, bankers in achieving their job targets, by purchasing investment products presented by them, without understanding the impact of these in our financial lives.

We are greedy: Tell us where we can make loads of easy money, we are always ready to buy that product.

We are irrational: We have various behavioural biases. We value reward more than risk. We tend to take decisions on the basis of recent events/experiences. We are easily veered towards decisions made by our various peer groups.

These behavioural biases lead us to a bad unsuitable investment portfolio, which if not acted upon and detoxified soon may lead to big trouble in personal finances in the long run.

Some steps to detoxify your investment portfolio

1. Investment Objectives:

This is the first and foremost step which helps you to understand the reason behind your investments. I have met many people who after investing in a particular instrument either under obligation or ignorance gives reason to that “ Chalo…baccho ki shaadi mein kaam aa jaenge” (It will be useful for children's marriage) …and in this manner,  keep on accumulating many unwanted investment products in the portfolio. If while purchasing a product you have clear vision in mind you will be able to select the right vehicle, right product for a defined goal.

Check if all your investments match with your goals. If there is no match then it means you are continuing with them to justify your decisions which actually were bad ones.

2. Asset Allocation:

After setting your objectives you know what amount you require and when. Now is the time to understand the asset classes, their risk-return parameters and selecting amongst them for your goals. There are commonly four asset classes in India which you can invest in- Equity, Debt, Gold and Real estate. Equity and Real estate are the most risky but have the potential to deliver good returns in long term. Gold and debt are comparatively the safer asset classes. The time frame of your investments, your risk taking ability and your current financial ability will help you select a suitable mix of asset class. Your investments should be balanced between these assets keeping in mind the risks, returns and objectives.

Now for detoxification purpose, find out the exact asset allocation of your current portfolio. Look at your equity exposure through ULIPs, equity mutual funds etc. , debt exposure through FDs, FMPs, NSCs, PPF, EPF etc. , gold through jewellery, ETFs and real estate through physical holding and PMS vehicle. Then see whether it is tilted towards any particular risky or safe category. The allocations should be suited your objective, not only to your emotional satisfaction.

3. Diversify your investments:

Once you have decided the asset classes, it is the time to select an investment vehicle. While selecting the same you should understand the value of diversification. To diversify, in its true sense means bringing in variety. Invest in different sectors and industries which don’t relate to each other. Distribute investments among different companies or securities in order to limit losses in the event of a fall in a particular market or industry. Many people invest in large number of equity mutual funds without understanding the investment objective and style of fund and think of it as diversification. But going a bit deeper into such portfolio one finds that all the funds are almost same. A very common example of this is a portfolio having investment in both HDFC Top 200 Fund and HDFC Equity Fund. Both the funds are almost the same, in investment style and objective and even in have the same fund manager.

Besides equity, diversification plays important role in debt too. It is not wise to keep all your investments in the fixed interest bearing instruments. You should also have exposure to tradable NCD’s, open ended debt mutual funds which trade in the debt securities and are very advantageous in the falling interest rate scenario.

4. Move out of your insurance linked investment plans

Investments portfolio should consist of only investment instruments. There is no scope of bringing insurance into it. Insurance, even though very important, is an expense. From financial planning point every individual should get adequate risk coverage. But once adequately insured no other expense related to it directly or indirectly should be borne by you. Insurance linked investment products are very bad for your investment portfolio as these are expensive products. If you feel you have bought any such products, ask you financial planner to assist you to understand the suitability of these in your portfolio. Understand the value of money and its opportunity cost and surrender all the not required plans to cleanse your portfolio completely.

The above steps can also be followed by the first timers to design the suitable investment portfolio. Repeat this exercise once every year to ensure that your investment portfolio is well positioned to meet your long term investments objectives.

Go ahead, get a financial health check-up done. Detoxify your investments portfolio and keep your finances always happy.

The author is a member of The Financial Planners’ Guild, India (FPGI). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.

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