Is Your Mutual Fund Portfolio Healthy? Get a Quick Health Check-up

January 18, 2023 Mutual Fund

The beginning of a new year is an ideal time to make healthy lifestyle changes, break bad habits, and improve your overall well-being. The most common New Year’s resolutions are to exercise daily, lose weight, avoid junk food, eat a healthy diet, and get enough sleep. By sticking to these resolutions, you can keep yourself fit and healthy all year long.

Your physical health and well-being are a major priority, which necessitates an annual health check-up with your physician for overall good health. Similarly, your investment portfolio needs a health check-up on a periodic basis. Investors should periodically measure performance and analyse the types of risk that can impact their investments.

With so many investment possibilities accessible, putting together an investment portfolio is simple. However, if you want to create a wealthy corpus and reach your desired financial goals, you must be aware of investment patterns and other factors that influence portfolio performance. Market swings and economic downturns characterised by high volatility directly impact your investments.

Given the inherent risk in mutual funds, making smart investments in worthy mutual fund schemes matched with your goals is only half the job done; tracking the performance of your investments periodically is equally crucial. By making wise choices, you may ensure that market abnormalities do not have a negative impact on your investments and finances. As a result, it is critical to monitor the health of your Mutual Funds Portfolio from time to time.

The mutual fund portfolio’s health refers to its ability to perform in difficult market conditions. If your mutual funds deliver excellent returns even when the market is underperforming, your mutual fund portfolio is in good shape. On the other hand, the portfolio’s low performance suggests poor health.

What are the benefits of conducting a health check-up or a mutual fund portfolio review?

• Identify potential risks

  Identifying the risks in your portfolio is a key aspect of this health check-up. You can learn about the impact of interest rate changes, assets with low credit quality, and whether your investments are overly exposed to a particular class. For example, equity is very volatile, and if your portfolio contains a major portion allocated to equities, it will be highly risky under adverse market conditions. As a result, by conducting a portfolio review, you will be able to detect and mitigate possible downside risks to your portfolio.

• Eliminate underperforming assets

  Annual health checks are recommended to detect and prevent health problems before they become severe, as well as in the early stages of diagnosis or therapy. Similarly, analysing your mutual fund portfolio will assist investors in identifying underperforming holdings that reduce overall portfolio performance before they cause major losses.

  You may eliminate the consistently underperforming mutual fund schemes after analysing the performance and market conditions thoroughly. It will prevent your portfolio from attracting undue risks and slumping overall portfolio returns.

• Identify the cause of lower returns

  Your mutual fund portfolio may yield lower returns than the benchmark. Lower returns are caused by a variety of factors, including the underperformance of your assets. Assessing these factors is an important element in determining the health of your portfolio. High exit loads, extra payments to fund managers, etc., are some of the reasons.

• Rebalance your asset allocation

  To get the most out of your investments and understand the health of your portfolio, you should look into the impact of asset allocation, which may help you understand stock selection, exposure to specific industries, etc. By monitoring the health of your portfolio, you can improve the diversification of your portfolio through appropriate asset allocation based on your risk profile and investment objectives, as well as discover new opportunities to control risks and thus increase returns.

• Align your investments to your goals

  When constructing an investment portfolio, you must have set specific S.M.A.R.T financial goals based on your initial requirements. However, since life is full of surprises, certain goals may become obsolete, necessitating the need to change or create new ones. A portfolio review assists in aligning the portfolio with your risk to ensure the successful accomplishment of your financial goals. It is critical to align your mutual fund investments with your goals to attain them within the specified time frame and maintain your financial well-being.

  The market is swamped with countless mutual fund schemes. Picking the right mutual funds to park your money is crucial but can also be challenging. However, a thoughtfully constructed investment portfolio of the best suitable mutual funds linked to your goals can ensure success in achieving your financial objectives.

To achieve each goal within the given timeframe, you must estimate the amount of money needed, work backwards to establish how much you need to save each month, and decide where to invest.

To conclude…

You see, a portfolio health check-up will assist you in identifying and addressing shortcomings in your portfolio so that you may work on those parts and mitigate risks so that your portfolio improves and generates better returns.

There is no such rule for conducting a review, but it is critical to assess your portfolio regularly, at least semi-annually or annually. In addition, consider reviewing your portfolio during certain life events, such as a pay hike, job loss, marriage, childbirth, death of a family member, a change in financial goals, and so on. External events such as a pandemic, geopolitical crises, wars and recession cause fluctuations in the financial markets and the world of business, which, too, call for a review of your portfolio.

Keep in mind that reviewing your portfolio on a regular basis can help you create an all-weather portfolio. As you enter the new year 2023, while you focus on maintaining your physical health, it will be prudent to do a portfolio review of your mutual fund investments to focus on your financial health as well. Remember that the investment decisions to Buy, Hold and Sell the investment instruments in the portfolio should be rational, scientific, and unbiased with thorough research and analysis.

This article first appeared on PersonalFN here