Why portfolio review is a must

Portfolio review is an important part of financial management. Ideally, one should go for it once in every six months or once a year. Another important occasion to go for a review is when there is a major change in your life, that is, if you are changing your job or getting married.

Of course, an occasional tweaking of your portfolio is also necessary to keep you abreast with the existing market situation. But remember that occasional tweaking could even mean no tweaking, at times.

As the legendary investor, Warren Buffet has said, "Occasionally successful investing requires inactivity. "But often it is necessary to take a fresh look at your portfolio when the markets rise too quickly or fall flat.

You will need to answer important questions about your investment goals before shifting  money from one investment to another..

Remember portfolio review is like going for a yearly medical check-up. You may not be exactly ill but a yearly executive check-up ensures that diseases don't crop up suddenly.

The idea is to take precautionary measures. And it depends upon the results of the check-up that the doctor decides what treatment you may need or none at all. 

Similarly, if one is going through a portfolio review during/after a bull run and feeling jittery about the market conditions, it is a good idea to book profits. But equally important is to keep a gameplan ready before you start gathering all that cash on what will you do with the sale proceeds.

In other words, you need to be very clear whether you intend to plough back the sale proceeds into some other instrument or purchase a home or reinvest it somewhere else. Let us look at a couple of situations.

One, are you going to invest the proceeds in another equity fund after encashing from one that has seen major upside? - It is always good idea if one has been able to spot the next winner. But switching money from one fund to the other just because the net asset value (NAV) of the other fund is lower than the first is never a smart move.

Often, we fall for the Rs 10 trap or the NFO trap. Just because a fund is being launched at an offer price of Rs 10 (or at par value - as many refer), the fund does not become a good option or even a safer option. Remember whether the NAV of a fund is high or low, has no relation to how a fund would perform in future.

Two, are you going to keep the money in cash/money market funds and wait for the "correction"? There have been many instances of investors waiting for the correction in the market and the market continues to go upwards.

Timing, at best, is an extremely difficult proposition and generally an impossible one. One would be better off - financially and emotionally - without resorting to timing the entry and exits in the investment markets, especially in those of volatile nature.

And even if the markets were "incorrect", remember what John Maynard Keynes said, "Markets can remain irrational longer than you can remain solvent".

In other words, any action that one may need to take, thus, has to be a part of a broader investment plan involving various factors. Investor's needs, the risk taking ability and the time horizon are the most important factors. All these change with time and circumstances. Most often these circumstances are specific to an individual rather than general like change in market conditions.

A recent change in the structure of interest rates is a good example of a general situation, which has adversely impacted the markets. In this scenario, it is a good to review one's portfolio. If the preferred investment vehicle has been mutual funds, you have outsourced the job of taking a view of the market to a professional manager.

However, if you have taken a home loan, it could be a good idea to liquidate your investment portfolio to repay the loan, if it is on a floating rate. For instance, a year  back the floating rate for home loans were hovering around 9 per cent .  Now they  are up to around 11 per cent. If an investor expects the equity market to deliver 12 per cent  to 15 per cent over the next five years, the gap between returns from portfolio and the cost of borrowing (even after adjusting for the saving in tax) would be high for the risk that equity market carries.

At the same time,  the profits of the companies may get adversely affected because of higher cost of borrowing, leading to lower returns from the equity investments. So, when the returns are getting lower and borrowing cost is getting higher, it makes sense to reduce your borrowings as well as the costs involved. This ensures that you do not feel the financial burden in the interim period.