Why You Cannot Ignore Reviewing Your Portfolio and Building an All-Weather Portfolio Now

The government appears to have shrugged off responsibility for the monumental mismanagement and instead called it 'Act of God'. Now investors are left wondering what will happen to their investments, particularly the market-linked ones.

The Association of Mutual Funds in India (AMFI) data revealed, investors redeeming their equity mutual fund schemes; taking money off the table (for various reasons). Some investors even discontinued their Systematic Investment Plans (SIPs), which in my opinion is not a prudent thing to do, particularly when it is suitable and one of the best-performing mutual fund schemes.

Now that India is gradually unlocking from the COVID-19 lockdown (although cases are rising), and numerous relaxations are given to several industries in the unlock 4.0, I see investors are even more confused-whether to buy, hold or sell equity-oriented mutual funds on the backdrop of the undercurrents explained above and stretched valuations.

Net buying by Foreign Portfolio Investors (FPIs) in the last couple of months (plus participation by certain robinhood investors) abetted by liquidity is keeping the Indian equity market afloat. The rebound in FPI inflows since March 2020 has been V-shaped.

The CDSL data shows that in August 2020, the net inflow was more than Rs 47,000 crore (a record in over a decade).

This leads us to an interesting discussion: Can FPIs pull up Indian equity markets to new heights when the macroeconomic indicators look depressing; geopolitical tensions persist; coronavirus is failing to recede; and what should you as a prudent investor do?

I believe, the markets are trading in an expensive zone, the economic recovery will be fragile, creating jobs will be a challenge, consumption will remain muted for a while, and the country's banking system would continue to be under the pressure of bad loans.

In such a scenario, you cannot leave it to God alone. Remember, God helps those who help themselves. Hence, as a prudent investor get your investment portfolio reviewed. This would prove to be in the interest of your long-term financial wellbeing rather than being biased and trying to time the markets.

Here's how reviewing the investment portfolio helps...

1. Cull out consistently underperforming and unsuitable investment avenues

   It may be possible that you are holding consistently underperforming stocks and mutual fund schemes in the portfolio. Short-term underperformance (less than a year), due to market turbulence or when contrarian bets are freshly taken, can be ignored. But when the underperformance is persistent (across bull as well as bear market phases), it surely needs your attention.

   Besides, over the years it also likely that...

   • - Your financial circumstances may have changed (for various reasons)

   • - Inflation has inched-up at a much greater pace than expected

   • - Outlook towards money has changed

   • - Risk profile has been altered

   • - The risk-return expectations have changed

   • - Investment objectives today are different

   • - You wish to adopt a change in investment style

   • - And it may not be too long before the envisioned financial goals befall

   Unless you get professional help in reviewing the portfolio (at regular intervals, say bi-annually), you may end up holding unworthy and unsuitably investment avenues, which could prove damaging for your portfolio's health.

2. To incorporate changes in your cash-flows

   In this pandemic, with workplaces having allowed 'Work from Home' facility (for most functions), a lot of time and money is saved by employees on commute. This money, plus the increments (if any) received, are required to be deployed in wealth-creating investment avenues by conducting a portfolio review so that the envisioned financial goals can be possibly achieved sooner. Do note that a portfolio review is not just to review your existing portfolio, but also encompasses new investments that can help you achieve your financial objectives and goals.

3. Befittingly reset asset allocation and diversify

   Not all asset classes move in the same direction always. For example, amidst the uncertainty looming in the year 2020, gold has shone the brightest; while the returns clocked by equity, debt, and real estate have paled. The returns every year could be dissimilar and maintaining the asset allocation mix best suited for you is important. Therefore, it is vital to diversify across asset classes and investment avenues therein. A portfolio review will help you reset asset allocation within the limits best suited for you and diversify efficiently. Remember, the right asset allocation is the cornerstone of investing and serves as a strategy in itself.

4. To avoid portfolio duplication

   When we review portfolios at PersonalFN, we find many naive investors making this mistake. Often numerous mutual fund schemes belonging to the same category are loaded. For instance, some investors invest in four mid-cap funds with similar investment strategies and overlapping underlying portfolios, while their risk profile does not support it. A thorough portfolio review can help consolidate and rebalance the existing portfolio in such a case to make it more effective.

5. To ensure you aren't taking undue risks

   The number of schemes in your portfolio might be ideal as your per your earlier asset allocation; but what if the existing portfolio has drifted away from your desired risk profile? For instance, a multi-cap fund might invest significantly in mid-caps or large-caps. This would create a disconnect between your personal risk profile and the risk profile of the scheme. It is important that the investment portfolio is in sync with your risk profile, broader investment objective, financial goals, and the time horizon to achieve the envisioned goals.

6. To improve the return potential

   Once you identify schemes that aren't doing well for long or have been exposing you to undue risk profile, replace them with mutual fund schemes that could improve the overall return potential of the portfolio. By doing this you would clock efficient risk-adjusted alpha returns and accomplish the envisioned financial goals.

The decision to Buy, Hold, Sell the investment instruments in the portfolio should not be taken arbitrarily but must be based on a rational, scientific, and unbiased approach with thorough research and analysis with a comprehensive mutual fund portfolio review. You cannot afford to practice a "buy and forget" approach as it could do more harm than good to your investment portfolio and wellbeing.

Keep in mind, reviewing your existing portfolio is the first step to creating an all-weather portfolio.

In fact, on the backdrop of the macroeconomic challenges, COVID-19 crisis, and geopolitical tensions; constructing the investment portfolio strategy in such a way that it works under all market conditions will prove to be a prudent strategy.

Creating an all-weather portfolio...

At PersonalFN, we believe following the time-tested Core & Satellite Approach---a strategy followed by some of the most successful investors---would help you build a robust all-weather portfolio with the best equity mutual fund schemes.

The 'Core' holding should comprise around 65%-70% of your equity mutual fund portfolio and consist of large-cap fund, multi-cap fund, and a value style fund.

Whereas, the 'Satellite' holdings of the portfolio can be around 30%-35% comprising of a mid-cap fund, a large & mid-cap fund, and an aggressive hybrid fund.

To build a 'Core & Satellite' portfolio of some of the best equity mutual fund schemes, here are some ground rules:

• ✓ Consider funds that have a strong track record of at least 5 years and have been amongst the top performers in their respective categories.

• ✓ The schemes should be diversified across investment styles and fund management.

• ✓ Ensure that each selected scheme abides with its stated objectives, indicated asset allocation, and investment style.

• ✓ You should not only invest across investment styles (such as growth and value) but also across fund houses.

• ✓ The mutual fund schemes should be managed by experienced and competent fund managers and belong to fund houses that have well-defined investment systems and processes in place.

• ✓ Not more than five schemes managed by the same fund manager should be included in the portfolio.

• ✓ Not more than two schemes from the same fund house shall be included in the portfolio.

• ✓ Each scheme that is to be included in the portfolio should have seen an outperformance over at least three market cycles.

• ✓ You should restrict the count of mutual fund schemes in your portfolio to seven.

Once you create an all-weather portfolio, monitor it at regular intervals (bi-annually), rather than timing the market. Following such an approach to mutual fund investing tends to work well in the long run.

Here are six advantages of the 'Core & Satellite' Approach to investing:

1. Provides optimal diversification;

2. Lowers the need for constant portfolio churning;

3. Reduces the risk involved in your portfolio;

4. Helps you benefit from a variety of investment strategies;

5. Allows you to create wealth cushioning the downside; and

6. Holds the potential to outperform the market

If you wish to invest in a readymade portfolio of top recommended equity mutual funds based on the 'Core & Satellite' approach to investing, I recommend subscribing to PersonalFN's Premium Report, "The Strategic Funds Portfolio For 2025 (2020 Edition)". This premium report will help you build your optimum mutual funds portfolio for 2025 with no effort on your part. If you haven't subscribed yet, do it now!

Happy Investing!

Warm Regards,
Rounaq Neroy
Editor, Daily Wealth Letter

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