Year end portfolio review

2022 has come to an end and 2023 has begun. 2022 was a difficult year for global equity markets with high inflation, rising interest rates and an ongoing war in Ukraine. Major global market indices e.g. Dow Jones, NASDAQ, DAX, CAC, Nikkei and Hang Seng, all ended the year in red. India was a bright spot in the global equity markets, closing the year with modest gains despite high volatility. There will be global headwinds for equity in 2023 as well, due to persistent inflation and high interest rates. Before you do your financial planning for the New Year, you should do review of your investment portfolio and see what changes may be required for your financial planning in 2023.

Why is portfolio review important?

• Asset allocation: Asset allocation is an important part of financial planning. Asset allocation depends on your life-stage, risk appetite and financial goals. You should review your asset allocation from time to time, to ensure that it is aligned to your financial goals and risk appetite.
  
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• Reassess your risk appetite: It may be an over-simplification to assume that your risk appetite will remain unchanged over the years. Stage of life, changing life situations, one-time events like inheritances, property sales etc may change your risk appetite. If your risk appetite changes, then your asset allocation should change accordingly.


• Weeding out underperformers: One of the reasons, why many portfolios underperform is that, investors hang on underperformers for a long time. Sometimes you may not even know if a fund in your portfolio is underperforming. You can use portfolio reviews to identify underperformers and replace them with better performing schemes. However, you should have a method in how you review fund performance. We will discuss that in more details later.


• Tax planning: Portfolio review will help you know your tax obligations for your mutual fund transactions made during the year. Mutual funds do not deduct TDS for capital gains in redemptions. For IDCW (dividends), 10% TDS is deducted for dividends exceeding Rs 5,000. However, you should calculate your capital gains and dividends for filing your Income Tax Returns (ITR) and for your tax planning. You may also like to read why tax planning with mutual fund ELSS is a good option


• Portfolio housekeeping: If you have not done a portfolio review for many years, you may find several things that may need your attention. For example, you may find accounts / folios where you may have to change your bank accounts, phone numbers, email addresses, nominees, etc. There may be accounts / folios where you are the single account holder and you want to add your spouse or some other family member also. There may be unclaimed dividends in some folios. You can think of this as the regular spring cleaning or Diwali cleaning, where you get rid of unwanted stuff and keep your home, neat and clean.

How to review your portfolio?

• Know your financial goals: All investors, irrespective of stages of life have financial goals, whether they are short term, medium term and long term. Are your investments tied to your financial goals e.g. buying a house, children’s education, retirement planning, wealth creation etc? If not, then you should ensure that all your investments are tied to your financial goals.
  
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• Re-evaluate your risk appetite: Your risk appetite may change over time and changing life situations. Should you be taking more risks to get higher returns over long investment horizon or should you reduce risks? Re-evaluate your risk appetite objectively. If required, you should engage with a financial advisor.


• Optimal asset allocation: The optimal asset allocation balances risk and return, based on your stage of life, financial goals and risk appetite (depending on your financial situation and risk tolerance). What should be your optimal asset allocation? If required, you should engage with a financial advisor to know your optimal asset allocation.


• Rebalance your asset allocation: Review your current asset allocation and see, if rebalancing is required to bring your asset allocation to optimal levels. Even if your optimal asset allocation has not changed, rebalancing may be required because market movements may skew your asset allocation. You should always consider tax consequences in rebalancing and make tax efficient investment decisions. If required, you should consult with your financial advisor.


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• Review fund performance: You should know which funds in your portfolio have outperformed and which funds have underperformed. You should have objective criteria when reviewing fund performance. Fund performance should always be evaluated against a benchmark market index. Every mutual fund scheme has a benchmark index (you can find the benchmark index in the Scheme Information Document or you may ask your financial advisor). You should always have long investment horizons, when you are comparing the performance of your fund with the index. In our view, you should have minimum 3 year investment horizon for comparing fund performance against benchmark. If your fund has underperformed against the benchmark over sufficiently long investment horizon, then you may consider replacing the fund with better performing funds in the same category.


• Consolidate your investments / portfolio overlap: It is often seen that, investors invest in many schemes of similar risk / return profiles or fund categories; this is also known an over-diversification. Over-diversification does not necessarily mean that your portfolio is more diversified; it may simply imply that you are investing in too many schemes of the same type. Often this results in portfolio overlap, where two or more schemes have a large percentage of their holdings in the same underlying securities. This will not improve portfolio performance; on the other hand, it may result in sub-par performance because the underperforming funds will drag the portfolio performance down. You can check portfolio overlap of your funds using our Portfolio Overlap Tool. If you have invested in a large number of funds with high portfolio overlap, you can consolidate your investments in the top performing funds.
  
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• Capital gains statement: Your mutual fund distributor should provide you with a capital gainsstatement, so that you know your tax obligation for the year. If you are a DIY (Do it yourself) investor, you can also get capital gains statement from the Registrar and Transfer Agencies (RTAs). You will also have to pay taxes for dividends (IDCW) if any, based on your income tax rate. The year-end portfolio review should include preparation for filing your ITR and tax planning.


• Check mutual fund accounts / folios needing updating: This is related to the portfolio housekeeping work (mentioned in the previous section). You may have to update bank account, email / phone number, nominees etc. If required, you should engage with a financial advisor if you need help in getting the work done

Conclusion

Year end portfolio review is an important step in your ongoing portfolio management. Your mutual fund distributor or financial advisor should be doing an annual portfolio review with you; in case he / she has not scheduled time to do this, you should insist on a year-end portfolio review.Year end portfolio review is also important for DIY investors. The year-end portfolio review is an important step in the financial planning for the New Year.