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Importance of Portfolio review

  January 4,2019

While investing for any specific goal, we always assume some rate of return from the investment based on some rationale. Actual return may vary time to time from assume return, so it becomes very important to check whether we are getting that return or not. We also need to check how various asset class and schemes are performing in our portfolio. This exercise is known as review and it should be done on periodic bases. Ideally once in a year, you must review your portfolio.

Reviewing doesn’t necessary means frequent buying and selling based on performance. The return which we assume is for the CAGR return for entire period of investment and need not to be equal to assumed CAGR every year.

How to review your mutual fund schemes:

You can review the performance of your scheme and compare it with the performance of benchmark. Apart from benchmark you can also compare it with peer group performance.

Performance of good scheme also may lag in some times, so short term performance should not be given too much of weight while doing the review of the portfolio. Rather than short term performance, you must consider long term return and consistency in performance.

Apart from return you also need to compare your portfolio on other parameters like risk, risk adjusted return and quality of portfolio while reviewing the scheme.

If scheme underperforms on all the above parameters you should exit the same and invest in some other scheme.

But, remember review doesn’t necessary means buying and selling every time while you review. The decision of exiting should not be based on short term underperformance noticed during review. You need to adapt holistic approach of reviewing the scheme by taking in consideration of other important parameters also apart from short term return.

Once you know where you are going by setting appropriate investment objectives, your portfolio review will help you reach your destination. How? By identifying problems and mistakes that you can correct midcourse. Much like a pilot, your job is to stay on course so that you can reach your destination safely and in a timely manner.