Portfolio Health Check-Up: Five Things Investors Need To Evaluate

The cost of a health check-up is never a waste. Having regular reviews can help early detection and prevention of potential issues.

Similarly, it is important to ensure that your portfolio undergoes regular reviews. There are some elements that these financial planners recommend you to evaluate.

Investments are made in mutual funds or other instruments to meet or accomplish financial goals. The trajectory of getting there and the time horizon to achieve these goals are equally important.

“Performance is a very bid parameter that needs to be tracked. It helps the investor understand if the performance is at par with the broader markets,” said Mrin Agarwal, founder of Finsafe India Pvt.

While reviewing the portfolio, you need to evaluate how close they are to your goal, if they are on track, and follow up accordingly.

“You always need to track the progress in achieving your goals. One can think about what is helping them get closer,” said Jigar Patel, principal officer at Neuron Wealth Investors LLP.

With change in mutual fund values, asset allocation may also need modification. The recent growth in equity markets would have increased allocation to equity in most portfolios, specially when compared to debt. One needs to understand the risk tolerance of their portfolio and the flexibility that is still available.

“Once a year, a review can be done. Knee-jerk reactions can happen when reactions based on decisions are taken. Don’t get carried away by the market movement. Understand the allocation, purpose of each and actions that need to be taken," said Agarwal.

Similarly, valuations within equity in various categories may also change. Most investors look only through the lens of returns when picking the category they want to invest in.

The ultimate goal of investing is to increase risk-adjusted return—increase return for the same level of risk and reduce risk for the same level of return. For within categories as well, the risk taken by the mutual fund to generate the return needs to be understood by investors.

“See whether the risk taken is in line with the investment horizon,” said Agarwal.

There are few ratios like the Sharpe ratio that the investors can use to understand the risk across various funds and categories.

“Minimising the risk is as critical as chasing high returns. Risk remains a good criterion to evaluate one's portfolio," Patel said.

Comparing return of a particular fund with the average return in that category also helps understand how the fund is performing within the defined category, both on an absolute basis and consistently.

Comparing return of fund when compared with benchmark returns is important. Especially, active funds consistently beating the benchmark is critical.

“For funds with riskier profiles, liquidity is an aspect to consider," said Agarwal.

The traction for passive mutual funds have been on the rise. The number of new fund offers and the assets under management in the category have seen a steady growth.

Despite the cost advantage that is available in this category, it is important to consider the issues that they are subject to.

“There’s a move to passive funds for cost but there is also tracking error. This needs to be considered with the performance of the fund," according to Agarwal.

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