Welcome 2021 With A Revisited Portfolio

Welcome 2021 With A Revisited Portfolio


Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

As we step into 2021, expecting it to be a better year than 2020, both in terms of health and wealth, it would be a great idea to take stock of your portfolio and ensure that it has the right mix of asset classes and products to benefit from the improving economic and market scenario. Although there is no significance of reviewing your portfolio in greater details at the start of a new year, it does bring in discipline into that process. Besides, realigning your portfolio every 12 months makes this process more tax-efficient.

There are a few important aspects relating to your portfolio that require attention on an annual basis. A disciplined approach in analysing the composition of your portfolio ensures that it remains on track to achieve investment goals over different time horizons as well protect your asset mix from the risk drift. Here is what you need to do:

1) Define your risk tolerance, if you haven’t done that already.
Risk tolerance plays a significant role in designing an optimum investment strategy. Hence, you must follow the right process to determine your risk profile. Here are a few guidelines: Having a clear idea about time horizon for each of your goals can help you determine your ‘comfort level’ with regard to volatility. Simply put, you must always consider the effect of potential downside as well as potential upside on your portfolio within a defined level of risk tolerance. Besides, you must adhere to the principles of effective diversification. This will help you in achieving a variety of distinct risk and reward objectives and reducing the overall portfolio risk. Remember, sometimes the risk tolerance may change either due to major adjustments in return objectives or to a realisation that an existing risk tolerance is inappropriate for your current situation.

2) Keep asset allocation relevant.
Take a close look at your existing asset allocation. It’s important to do so as it determines the kind of risk you can get exposed to over your defined time horizon and what to expect in terms of returns. If your current asset allocation is too aggressive, it’s time to rebalance it. While investing in debt instruments, look for tax-efficient options, such as mutual funds. On the other hand, if your asset allocation is too conservative, it’s time to either start investing in equities or increase allocation to it to give your portfolio a chance to earn positive real rate of return i.e. gross returns minus inflation and taxes. Remember, a disciplined investment process whereby you commit to invest on a regular basis can go a long way in minimising the impact of volatility on your investment portfolio.

3) Check exposure to different market-caps.
The market-cap of a company signifies its market value, which is equal to the total number of shares outstanding, multiplied by the current stock price. It has a role to play in determining the kind of returns a stock might deliver and the level of risk or volatility that you may have to encounter from it.

For example, large companies are usually more stable during turbulent periods and mid-cap and small-cap companies are more vulnerable. Hence, you must keep an eye on segment-wise allocation in the portfolio. If you don't feel confident about doing it yourself, take the help of a professional at the initial stage as well as for rebalancing the mix on an ongoing basis. However, you must participate actively in this process as your inputs would define the broad parameters to get the allocation right.

4) Review your insurance portfolio.
Make sure you are adequately insured. If you have been following a strategy of mixing your investments with insurance and have accumulated a number of policies, it’s time to change that. Remember, it’s not the number of policies but the quantum of risk cover that should matter to you. A term insurance plan is an ideal product to reduce your costs and to ensure adequate risk cover. Besides, make sure you have adequate health insurance cover and that too through the right product.

 

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