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Portfolio Review, Rebalancing - Revamp
What’s a portfolio review?
Your Investment Portfolio Review will provide you with an assessment of your existing investment strategy. Our Investment Managers will analyse your valuation documents and provide feedback on how you are invested and what level of risk you are currently exposed to.
Why is it so important?
Regular Portfolio reviews are a great opportunity for you to assess your progress toward your financial future, You have invested in different classes of assets over a period of time to spread your risks. Owing to market conditions, however, some of your investments will do well at times, while others will not. It is therefore essential to review your investments from time to time and rebalance the portfolio as required.
Why is Rebalancing important for you ?
The primary objective of portfolio rebalancing is to establish better risk control, and ensure that your portfolio isn’t singularly dependent on the success or failure of a particular investment, asset class, or fund type.
How can rebalancing help you as an investor?
Rebalancing works as a risk-minimizing strategy for you as an investor. It allows you to line up your investment with your goals by periodically rebalancing your portfolio. If your risk tolerance or your investment strategies change, then you can rebalance the weight of the asset class in your portfolio by reassessing and devising a new asset allocation.
How can you rebalance your portfolio?
When you invest in mutual funds, you are investing to achieve a single goal via various vehicles. So when you rebalance, the shift must occur across all of these funds at the same time.
Here’s how you can rebalance your portfolio in 5 simple steps:
- Step 1: Primarily, have an asset allocation plan by considering your income, the expected time of retirement, and so on. Create an asset allocation framework, but if you are unsure speak to an expert – Sampradaa Investments can be of help here.
- Step 2: Assess your current asset allocation by identifying where and how your current investments are placed in stocks, cash, bonds, or any other form of investment. After this, make a comparative analysis of asset allocation target and its present state and make adjustments accordingly.
- Step 3: Chart out a rebalancing plan is your asset allocation target does not align with your current portfolio. This step can be tricky where you have to decide on the securities to retain and in what numbers. Speak to our experts at Sampradaa Investments to get clarity.
- Step 4: Be mindful of the tax implications, especially on capital gains. Avoid the short term taxes on capital gains by holding on to your equities for over a year. In the case of debt funds, the short-term capital gains will qualify for taxes based on the individuals’ income tax slab. For long-term capital gains, the tax is 20% with indexation. If you need to scale back, aim to sell the securities in the tax-exempt accounts first. In this way, you can limit the taxes you pay in capital gains.
- Step 5: Review your portfolio at least once a year or maybe once in six months to assess your position but rebalance it only when you feel that the allocations are significantly out of the track to reaching the target.
What is a Portfolio Revamp?
All this made it increasingly difficult for investors to navigate through the maze of funds and identify the right ones for their needs.
To simplify the process of selection of appropriate schemes and to help investors make more informed decisions, the Securities and Exchange Board of India came up with a new system of fund classification.
The new system aims to bring uniformity in the schemes, thereby facilitating scheme comparison across fund houses.
Based on the categories that have been defined by SEBI, Mutual Funds have been forced to revisit their entire universe of offerings, and decide which schemes to keep, which to merge, and which to wind down or change the fundamental attributes of.
This move could, therefore, have significant impact on investors' portfolios, forcing them to make suitable changes to them.
According to the new classification, all open-end mutual fund schemes will be placed under the following categories: Equity, Debt, Hybrid, solution-oriented, and others (Index Funds, ETFs, and fund of funds).
Only one scheme will be permitted in each category, except in the case of index funds/ETFs, fund of funds, and sectoral/thematic funds.
Effect on your portfolio
- The fundamental attributes of a fund that you hold may change.
- You need to understand if after the change the fund fits your needs.
- Selling a fund could give rise to tax impact and exit load, which you should try to minimise.
- Outperformance may decrease as fund managers will have to stick to a strictly defined universe of stocks, forcing you to consider passive funds as an option in some categories.