Your investment portfolio is a reflection of your financial journey. It can fill up with assets you’ve chosen—some that performed well and others that didn’t quite hit the mark. You may have an investment you were excited about, but it is now just sitting there, underperforming. Similarly, you might have held on to an investment that made sense a few years ago but doesn’t fit your current plans. Does this sound familiar?
It’s easy to get attached to different investment choices. However, holding on to assets that aren’t pulling their weight can slow you down. That’s where a portfolio cleanup or rebalancing can help. Think of it as trimming the excess to focus on what truly matters. In simple words, portfolio rebalancing is about realigning your investments with goals and letting go of what no longer serves you.
The best part is that this process doesn’t have to feel overwhelming. Let’s talk about how to approach portfolio cleanup step by step.
Step 1: Start With a Risk/Goal Check
You can choose the first step in portfolio cleanup to be asset-specific risk evaluation and its alignment with your current goals. Consider this a health check for your investments—it can help you understand what’s working, what’s lagging, and what no longer fits.
You can start by clarifying your goals.
Are you aiming for long-term growth, generating passive income, or preserving capital?
Your financial priorities might have evolved, and your portfolio needs to reflect these changes. Writing down your primary objectives can make it easier to compare them against your current investments.
Next, you can review how each asset has performed over a specific period and its corresponding risk level. For example, you can use standard deviation to evaluate the asset's volatility relative to its benchmark. Additionally, you may consider Sharpe Ratio to measure risk-adjusted returns—how much extra return the asset can deliver for the risk you take.
This can help you determine if they have consistently underperformed compared to market benchmarks or alternatives. Occasional dips in performance might not be a big deal. However, it’s worth a closer look if something has been dragging your returns for a while. You can benefit more from taking a holistic approach than considering these parameters individually.
Step 2: Prioritise Portfolio Diversification
Once you’ve identified the misaligned or underperforming assets, the next step is to focus on diversification. Portfolio diversification can help spread your investments across asset classes, industries, and geographies to balance risk and improve potential returns.
Why is this important? Markets are unpredictable. If one segment faces a downturn, a well-diversified portfolio may ensure not all your investments are affected at once.
A cleaned-up portfolio may allow you to diversify investments thoughtfully. You can review how much of your portfolio is concentrated in specific sectors or asset types. Accordingly, you can spread your investments across different types of
mutual funds to reduce risk exposure.
Remember, diversification isn’t about owning as many investments as possible but ensuring your assets complement each other.
Step 3: Bring Your Portfolio Back in Balance
Portfolio rebalancing means adjusting asset allocation to ensure it aligns with your financial goals and risk tolerance. This is important because market movements might have caused your portfolio to drift away from its intended allocation over time.
Suppose you initially allocated 60% to asset Class A and 40% to asset Class B. If stocks perform well, that balance might shift to 70-30, exposing you to more risk than you planned for. Conversely, if bonds outperform, your portfolio could become too conservative, potentially limiting growth.
Portfolio rebalancing is how you bring things back to the desired allocation. This can involve selling assets that have grown disproportionately or adding more to those that lag. You can rebalance the portfolio regularly—quarterly, semi-annually, or annually—or when your allocation shifts beyond a set threshold.
Step 4: Actively Remove Underperforming Assets
Once you’ve identified the assets that aren’t working for you, you can remove them from your portfolio with the guidance of your financial advisor. This will help you determine whether an asset truly qualifies as underperforming or misaligned with your goals. While it might sound simple, letting go can be tricky—both practically and emotionally.
You can prioritise which assets to sell first and focus on those clearly underperforming or no longer aligned with your current goals. It's about evaluating an asset's long-term role in your portfolio strategy. Decisions to hold or remove investments would require considering your investment horizon, risk tolerance, and broader market conditions in sync with your overall investment strategy.
The goal would be to act decisively rather than letting poor performers linger. You can reinvest the proceeds into assets that fit your goals or diversify your portfolio further. For example, if you’re transitioning from an aggressive to a conservative approach, you can redirect funds into bonds or index funds.
Step 5: Manage Tax Impact for Enhanced Returns
While taxes are often an afterthought, they can impact your overall returns. Tax-efficient investment strategies can help you reduce the tax burden on your portfolio and ensure more of your gains stay with you.
To do this, you need to review your investment types. For instance, long-term capital gains (from assets held for over a year) are typically taxed at a lower rate than short-term gains. If you’ve sold assets recently, you can consider the timing of your sales—holding onto investments for longer can reduce tax liabilities.
Similarly, you can include tax-saving instruments like ELSS (Equity-Linked Savings Schemes) to save on taxes while possibly contributing to your portfolio’s growth. If you’re unsure where to invest, aligning your portfolio with such options can help reduce the taxable amount.
Tax management isn’t about avoiding taxes altogether but making smart decisions that can minimise inefficiencies.
Mutual funds can play a significant role in portfolio cleanup and rebalancing.
They aim to offer a convenient way to diversify your investments across various asset classes, industries, and geographies, helping to mitigate risks while trying to optimizing returns. For instance, equity mutual funds aim to provide exposure to growth sectors, while debt funds may contribute in balancing your portfolio. Hybrid funds, which blend equity and debt, can also be one of the options for maintaining balance in line with your financial goals. Moreover, mutual funds are professionally managed, making them an accessible choice for investors who may not have the time or expertise to monitor individual assets. Whether you aim for long-term growth, regular income, or capital preservation, aligning your portfolio with the right mix of mutual funds may ensure your investments stay on track.
What sets mutual funds apart is their flexibility and accessibility.
With options ranging from Systematic Investment Plans (SIPs) to lump-sum investments, they cater to diverse financial needs and risk appetites. SIPs, in particular, may allow you to invest smaller amounts regularly, making them a tool for disciplined investing and cost averaging over time. Additionally, mutual funds aim to provide transparency through regular updates on performance and holdings, enabling you to make informed decisions. By leveraging the expertise of fund managers and the wide array of schemes available, mutual funds may seamlessly adapt to your evolving financial objectives, making them an indispensable part of any well-structured portfolio.
Conclusion
A well-optimised portfolio is key to long-term investment benefits. Incorporating these steps into your portfolio management may streamline your investments and help you stay aligned with your financial goals.
SIP stands for Systematic Investment plan, wherein you can regularly invest a fixed amount at periodical intervals and aim for benefits over a period of time through the power of compounding
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.
