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Is your portfolio performing better?


For defining portfolio performance in a better way, the primary focus should be to track performance. And to track the performance two criteria’s are important and they are RISK and RETURN. Only High return figures cannot help you to make your portfolio perform better, another important thing is to make the risk-adjusted portfolio. A risk-adjusted portfolio doesn’t mean to take RISK but it means to go with a Risk-Adjusted portfolio. And the most significant point is to link your portfolio with the pre-defined goals.

So let us define the process for the portfolio to perform better.

1.   Define Goals:

It is very important to define the goals in mind for the Investment in your portfolio you make. To create the portfolio you need to understand the ultimate goals you have in mind. It plays a very crucial role in the formation of your portfolio. That is how the rationale is defined. For example, if you have a long-term goal of 8-10 years, you could obviously take high on equities but vice versa for short-term goals you cannot. For such short-term, balanced funds or debt funds will be more preferable. This is how the asset allocation is at its optimum.

2.   Risk-Adjustment:

Risk Adjustment is the terminology defining two approaches, first, where Risk is due, it is advisable to take risk. That means, when you have long-term goals, it is the most suggesting approach. Because, after a long gap, equities perform actually outperform from the other entire asset class margin. And generally, such performance is with minimal risk as the time frame is expanding. For example, a Young professional can easily take risk comparatively to the Old man.

3.   Balancing your Liquidity:

Liquidity is the very significant thing, it is very much necessary to protect yourself with appropriate amount for any emergencies which can occur in next 6 months. Once you are secured, then you can start building your investments. Apart from an emergency fund, the other goals like Child Education, Marriage, etc. For such goals, you should switch to liquid assets a few months before the maturity of goals to reduce any type of Risk.

4.   Target Rule-Based Approach:

To perform better in long-term, you should adopt the Rule-Based Approach. Such Rule base approaches you can also apply to liquid securities or debt, etc. The benefit of such an approach is that it involves minimum human discretion. For example, when Price Earning Ratio of any Nifty Index is less than 14, you can ask for more equities in your portfolio that means you can invest 70% of your portfolio in equity. And similarly, when PE of Index is more than 24, you will have to minimize the equity exposure to 30% of your portfolio.

5.   Re-Balance Portfolio at regular intervals:

As per my article Investment Portfolio Rebalancing, I have already mentioned that rebalancing your portfolio is the most significant task to make your portfolio perform better. Constant rebalancing is not suggestible but long gap for rebalancing is also not suitable. Thus, to rebalance it with Regular Interval is essential. Generally, prefer to plan your portfolio post-tax terms to help you outperform.

Thus, Basics are important to understanding for making your portfolio perform better!


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