Steps to undertake while conducting a mid-year review of your portfolio

Mid-year reviews have become extremely crucial for assessing portfolio health during Covid-19 times

If you thought 2020 was difficult, the year 2021 has come with its own set of challenges due to the second wave. While an annual reviewing of portfolio is important, in times like this a mid-year review becomes imperative. 

Jharna Agarwal, Head, Anand Rathi Preferred, says, "During such volatile times, mid-year reviews become extremely crucial for assessing portfolio health."

Every review start by asking the right questions. Finding out the answers and then making the required changes. Here's a checklist to help you review the past six months of money matters and tweak the next six.

Did you save according to plan?

First and the foremost, you need to review whether you were able to invest the amount you had planned for every month.

Manish P Hingar, Founder, Fintoo, says, "I have seen that 80 per cent of the times, people are not where they are supposed to be financially just because they did not save and invest as per plan. Performance of the investments is secondary."  If you find yourself off the target, sit with your significant other and make some money rules and set a monthly household budget. 

Rishad Manekia, founder and managing director, Kairos Capital says, "There is no defined optimal savings rate for an investor. It really depends on your financial situation and your financial goals. While there are thumb rules such as the 50-30-20 rule for defining how you should budget your income into wants, needs and savings, these rules can only be thought of as a starting point." 

The amount you save should be linked to your financial goals. For example, if you are 50 today and plan to retire at 65, that means you have 15 years to save up a corpus which will then need to last you for at least another 25-30 years. Similarly, if you have financial goals such as saving up for a child’s future education, you can define the cost of the goal and then plan and save up accordingly.

What's your asset allocation strategy?

Is there need for rebalancing your protfoliio in view of the recent market run-up? 

Asset allocation means allocating or investing in different asset classes like equity, debt, real estate, gold and so on. The right asset allocation aims to provide an optimal risk-adjusted-return that can help you achieve your goals and financial objectives.

Agarwal says, "Last one, year saw an fabulous returns in the equity asset class. Aggressive investors want to move more money into equities and Conservative ones want to book profit and move out completely. Both actions should be avoided. The right thing to do in such times is to realign and ensure your portfolio is in line with your ideal asset allocation."

Assets allocation depends on lots of factors such as the financial goal of the investment, the risk appetite of the investor and the time frame of the investment.

Hingar says, "Now is the time to check whether it is still valid owing to market ups and downs. Sensex is up 9.3 per cent and Nifty by 11.85 per cent in the first half of 2021. However, I would not suggest rebalancing the portfolio very frequently. It should be done under the guidance of your financial advisor as everyone enters the market at a different level."

Rebalancing the portfolio to a defined asset allocation is something one should do on a regular basis, as it helps in keeping the risk-reward ratio in check.

Manekia says, "If we talk about the current situation, the BSE Sensex is trading above 50,000 points, compared to sub-30,000 points some 15 months ago. The sharp fall and rise in equity markets during the pandemic could have changed the asset mix and therefore it is important to revisit the asset allocation and bring it back in line."

Adding to that, Agarwal says, "Do not get overly swayed by the past two year's returns on gold and international funds, as it is difficult for an asset class to continuously outperform. Maintain a moderate allocation to both."

Check fund performance

Look at a fund’s 10-year performance. If it is significantly below its benchmark and category average return, put it on your watchlist. Stop investing into that fund. Watch the fund for three or four quarters. If the underperformance continues, exit. Minimise your cost by ensuring you pay tax on long-term capital gains.

Do you have a big enough emergency corpus?

To save for a rainy day is always important, and in times like these doubly so. As the definition of “emergency” changes with the situation, so does the amount of emergency fund required. As a thumb rule, it is good to have six months’ income saved up as emergency fund. Adhil Shetty, chief executive officer (CEO) Bankbazaar says, "However, based on your experiences in the past one year and more, it would be a good idea to evaluate if your emergency fund is sufficient, and if it needs to be increased or reduced. You should also consider ways to replenish it if you’ve had to dip into it during the last one year."

Also evaluate the liquidity of the funds and ensure that you or your family can access it with ease and in time when required.

Insurance 

Evaluate your medical insurance and ensure that it provides sufficient cover for yourself and your family. Shetty says, "You may want to evaluate add-ons that provide additional or enhanced cover for certain illness or increase your overall cover." Take this time to also evaluate your life insurance cover and check if see the need for additional coverage or protection that’s not provided by your primary policy.

Hingar says, "Insurance needs typically does not change in short intervals. You should review it once in two years only if there is a major change in your income levels or needs."

Debt burden 

This is also a good time to look at your debts and draw up a repayment plan, especially for your home loan. Shetty says, "Even a small prepayment can go a long way in reducing the interest burden. There have been several rate cuts over the last year and half, and you should see if you can convert some of your expensive debt into less expensive loans."

Apart from doing a portfolio review, it's also good time to check if all assets have nomination in place. If any changes in nomination, address and like need an update, get done before the year ends.  If you don't already have a will, you should get one. And finally remember, reviewing is now pretty much a semi annual activity. So the sooner your family comes in alignment with the idea the better the financial state of the family. 

Thumb rules on life insurance cover

• Have life insurance equal to 15-20 times your annual salary.
• Reduce it as you move closer to retirement. As age increases, the number of years of work life that a person can lose due to untimely death reduces.
• With age, a person's net worth increases, and so his dependence on a life cover declines.
• If a person got married, had a child, or took a home loan in the previous financial year, he may need to enhance his life cover. 
• On the other hand, someone who paid off his home loan may reduce his cover.
• A well-to-do person living in a large city must have a base cover of Rs 10 lakh and a top-up cover of Rs 90 lakh.
• A middle-income person living in one of the top-25 cities beyond the metros should buy at least a Rs 5-7.5 lakh cover.
• Someone having a lower income should buy a Rs 2-3 lakh cover.