Why this is the best time to review your portfolio

7 MinsMay 25, 2020

The uncertainty amidst the Coronavirus lockdown has intensified the capital market volatility in India and across the world. There is a noticeable risk-aversion, as many reports talk of an unparalleled global recession -- probably worse than the Global Financial Crisis of 2008 and the Great Depression of the 1930s.


A portfolio review is an indispensable part of investing. In times like these, where uncertainty has gripped the world, safeguarding your financial health and paying attention to your investment portfolio is essential.

You may have made the best choices when you initially selected your investment options and started building your investment portfolio. But over the years it also likely that personal factors, as well as changes in the investment landscape, may warrant modifications to your asset allocation, i.e. distribution across asset classes equity, debt, gold, or even holding cash for that matter.

Some examples of personal factors include:

- Your financial circumstances changing (for various reasons);

- Inflation having inched-up at a much greater pace than anticipated;

- A transformation in your outlook towards money;

- A change in your risk profile;

- Changed risk-return expectations;

- Investment objectives today being different;

- You wishing to adopt a change in investment style; and/or

- It may not be too long before the envisioned financial goals befall

Changes in the investment landscape (such as the current pandemic):

  • In 2006 equity clocked a handsome +49% absolute return, gold +20%, while bonds 4%.
  • Last year, in 2019, equity clocked +14%, gold +16%, and bonds +11%.
  • And in 2020 so far, on a year-to-date basis (as of May 15, 2020) equity has lost nearly -25%, gold has gained around +10%, while bonds +5% in absolute return terms.

The risk-return proposition of each of these asset classes has changed over the years.

The investment avenues you picked initially may not have performed as expected, over the years. Short-term underperformance -- less than a year -- can perhaps be ignored. However, when returns pale over a longer period, unable to catch up with inflation (erode the purchasing power of money), then certainly it is a worrisome situation and a comprehensive portfolio review is a must as a course correction.

The aforesaid factors may warrant changes in your asset allocation, i.e. distribution across asset classes equity, debt, gold, or even holding cash for that matter.

Some factors to look at in specific to your assets include:

Equity portion:

- The total number of stocks and equity-oriented mutual funds

- The fundamental attributes of stocks and equity-oriented mutual funds

- The price-to-equity ratio (P/E ratio), the earnings trend (quarter-on-quarter, year-on-year), the Earnings Per Share (EPS), Return on Capital Employed (ROCE), Return on Assets (ROA), the dividend payout history, dividend yield, among many quantitative aspects

- The company-wise exposure

- Exposure to market capitalization segments – large-cap, mid-cap, and small-cap

- Sector-wise exposure

- In case of equity-oriented mutual funds – AMC-wise allocation, sub-category wise exposure to various equity-oriented funds (large-cap funds, mid-cap funds, small-cap funds, multi-cap funds, dividend yield fund, value style funds, focused funds, etc.), the underlying portfolio characteristics of the schemes, their investment styles, geographical diversification (via international funds) etc.

Debt portion:

- The total number of debt securities: corporate fixed deposits; debentures; bonds; debt mutual funds; bank fixed deposits, etc.

- The fundamental attribute of the debt securities held in the portfolio (who is the issuer; yield; the rate of interest; the investment plans/options; the tenure/Maturity/Lock-in Period; premature withdrawals, etc.)

- The issuer-wise exposure

- The credit rating-wise exposure

- In case of debt mutual funds -- AMC-wise allocation, sub-category wise exposure to various debt-oriented funds (corporate bond funds, credit risk funds, dynamic bond funds, duration funds, gilt funds, liquid funds, overnight funds, etc.), the underlying portfolio characteristics of the schemes held (whether the securities are issued by private entities, Public Sector Undertakings, Central Government, State Government, the maturity profile, and credit ratings conferred)

Gold portion:

In times of economic uncertainty, gold will display its sheen. Meaning, the spotlights will continue to be on the precious metal and it will prove its trait of being an effective portfolio diversifier, a safe haven, a hedge (when other asset classes fail to post alluring returns), and command a store of value. Ensure you have tactically allocated around 10-15% of your entire investment portfolio to gold and hold it with a long-term investment horizon.

Emergency cash or liquid holding:

And to pay your necessary monthly expenses and for an emergency, hold cash -- but not too much and not too little, just the ‘optimal’ cash level by evaluating your inflows and outflows. To deal with emergencies, hold around 12 to 24 months of regular expenses, including EMIs on loans. And ideally, park this money in a separate savings bank account, digital savings account, and/or a pure Liquid Fund or an Overnight Fund (and never touch this money unless needed for an emergency).

In this entire portfolio exercise, assess if the returns you have earned so far are respectable enough for the risk you were exposed to across the equity market phases (rising and decline) and interest rate cycles (upwards and downwards movement). If not, then look at what other options are available now, in the backdrop of the current macroeconomic environment. But alongside this, also consider the cost and tax implications of switching to other investment alternatives.

[Also Read: Why SIPs are your best bet in a volatile market]

When a portfolio review is done prudently, it brings with it the following seven benefits:

1. Helps reset asset allocation

2. Align the investments as per your risk profile, investment objective, envisioned financial goals, and the time in hand to achieve those goals

3. Cull out underperforming and unsuitable investment avenues

4. Replace and restructure your portfolio with deserving and suitable options, but at the same time keep in mind the weightage to each asset class or security

5. Facilitates portfolio consolidation and rebalancing

6. Ensure optimal structuring and diversification of the portfolio (which is one of the basic tenets of investing)

7. And ensures that you are on track to accomplish the envisioned financial goals

Don’t ignore protection

Since this is also a health crisis, take this opportunity to make sure you have adequate health insurance (with one of the best policies), for the financial security of your family. Given the rising health inflation, you may need to increase your health cover by buying a top-up policy or a critical illness cover.

Ensure COVID-19 does not leave your investment portfolio in jeopardy. Remember, an ounce of prevention is better than a pound of cure. Hence, swing into action and review your portfolio comprehensively today!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN 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.