Why portfolio review is a must if the equity market is continuously rising

It is essential to avoid skewing your investment towards equities and to keep your asset allocation plan on track

The Indian equity market is in an exuberant phase -- scaling new highs -- supported by all-around participation from retail, High Net-worth Individuals (HNIs), Domestic Institutional Investors (DIIs), as well as Foreign Portfolio Investors/ Foreign Institutional Investors (FPIs/FIIS). Besides, low interest rates have taken off the sheen from some of the traditional investment avenues. In times like these, remember Warren Buffett’s advice: “Be fearful when others are greedy and greedy when others are fearful”. 

There is a tendency to turn less cautious when equity markets touch new highs. Few things you should refrain from doing during such times are:

• Skewing your investment to equities (particularly mid and small-caps) and disregarding asset allocation
• Expecting supernormal returns over the short-term
• Chasing every IPO that hits the market expecting extraordinary listing gains
• Picking stocks or equity mutual funds based only on their past performance (which is not indicative of future returns)
• Acting upon unsolicited investment advice and investing randomly in stocks and mutual funds
• Discontinuing SIPs in worthy equity mutual fund schemes
• Not holding adequate cash in hand and/or in the bank
• Liquidating money parked in bank fixed deposits/debt holdings to deploy in equities

How to review and rebalance your portfolio?

As the first step towards portfolio review and rebalancing, you must re-evaluate your risk profile. This is because, with time your ability to take risks may have altered, your outlook towards money may be different, investment objectives may have changed, inflation could have risen, risk-return expectations may have changed and/or you could be approaching your financial goal.

Based on these factors check, if your asset allocation, i.e. distribution across asset classes equity, debt, gold, or holding cash, warrants a change. Then, look at the following aspects when you review the equity portion of your portfolio: 

• The total number of stocks and equity-oriented mutual funds
• The fundamental attributes of stocks and/or equity-oriented mutual funds and other quantitative aspects
• The company-wise exposure
• Qualitative factors along with quantitative factors
• Exposure to market capitalization segments – large-cap, mid-cap, and small-cap
• Sector-wise exposure
• In the case of equity-oriented mutual funds – your AMC-wise allocation, sub-category wise exposure to various equity-oriented funds (large-cap funds, mid-cap funds, large & mid-cap funds, small-cap funds, multi-cap funds, flexi-cap, dividend yield funds, value or contra style funds, focused funds, etc.), the underlying portfolio characteristics of the schemes, their investment styles, the returns generated, the risk you were exposed to, the risk-adjusted returns clocked, the performance across market phases (bulls and bears), the fund managers track record, the investment processes and systems followed at the fund house, etc.

Doing this will provide a comprehensive understanding of your portfolio. For instance, you may discover that some of the stocks or equity mutual funds that you picked initially, did not perform as expected over the years. Short-term underperformance -- less than a year -- perhaps can be ignored, if the fundamental thesis for the investment is still intact. However, if the returns have paled over a longer period and were unable to catch up with inflation (eroded the purchasing power of money), then you certainly need to pay attention to a course correction. This will help you weed out the duds as well as book profits in stocks or mutual funds that have delivered stellar returns over time and trim/add your equity allocation accordingly.

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• Align the investments as per your risk profile, investment objective, your financial goals, and the time to achieve those goals
• Incorporate changes in cash-flows 
• Reset the asset allocation within the limits best suited for you
• Replace and restructure your portfolio with suitable avenues within the asset class (and other asset classes)
• Ensure adequate liquidity within the portfolio
• Potentially improve the risk-adjusted returns of the portfolio
• Preserve wealth while you create it
• Make sure you are on track to accomplish the envisioned financial goals

When investing in equities, a ‘buy and forget approach’ does not always pay off. Reviewing your portfolio regularly, particularly at the peaks and troughs of the equity market, is necessary to take strategic investment decisions. 

How should young investors invest in equities at a market high?

• Currently, if you are young, risk tolerance is high, investment objective is growth, and have financial goals that are more than 5 years away; you may stagger your lump sum investments in stocks and opt for Systematic Investment Plans (SIPs) in equity mutual funds. 
• Strategically, you may hold a major portion of your portfolio in equity or equity-oriented hybrid mutual funds spread across market capitalisation with a large-cap bias keeping an investment horizon of 5-7 years.
• It would also be a sensible and smart strategy to allocate at least 5-10% of your entire investment portfolio to gold and hold it with a long-term investment horizon. The uptrend exhibited by the precious yellow metal over the last 10 years and more highlights the importance of holding it in the portfolio which has diversification benefits– preferable via Gold ETFs and/or Gold Savings Funds – with a long-term view.
• It would be prudent to hold a small portion of your portfolio in high credit quality debt mutual funds with maturity commensurate with your investment horizon.
• Also, hold ‘optimal’ cash (in a Savings Bank Account and/or an Overnight Fund or liquid mutual fund) to cushion the volatility. This serves two purposes: 1) In case of market correction this portion will act as a cushion to the portfolio and 2) You can access funds easily for new investment opportunities that may come your way. 

Sticking to your investment strategy, being disciplined and a timely and regular review and rebalancing of your portfolio will determine your investment success.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision

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