Narendra Modi’s government reorganized its cabinet, inducting new ministers and asking old ones to leave. He also formed a new Ministry of Cooperation. The heads of the main ministries – interior, finance, foreign affairs and defense – have been selected.
Just as the central government has evaluated and made changes to its ministers, investors need to rethink and rebalance their portfolios.
REGULARLY EVALUATE THE PERFORMANCE OF THE PORTFOLIO
Regularly evaluating your portfolio is the key to achieving your financial goals. If you have a mutual fund in your portfolio that you think hasn’t performed well, assess it and quit. But before you opt out, rate it on a few parameters.
First, check if it is performing better than its benchmark. Then compare the system to its peers and assess its performance. Finally, give it four quarters before you finalize your decision. See if the underperformance is temporary and if the fund manager is able to correct it. If things don’t improve for four quarters, exit the plan with taxes and exit charges in mind.
You should also focus on maintaining asset allocation. Suppose an investor has a portfolio of 70% equity and 30% debt. If stocks go up significantly, its asset allocation can go haphazard. Therefore, you need to review your portfolio regularly and restore balance.
ADVENTURE IN NEW PRODUCTS OVER TIME
The National Democratic Alliance (NDA) opted for cabinet enlargement after completing half of his second term. He also added the Ministry of Cooperation after being in power for more than seven years.
As an investor, you should also start with traditional, tried and tested products, such as diversified mutual funds, bank term deposits, liquid funds, provident funds, etc. Once you have matured as an investor and familiarized yourself with different asset classes, then you need to add other products after fully understanding their risks and rewards. For example, investors should only turn to thematic funds, sector funds or strategy-based funds after they have gained some experience of investing in equities.
GOALS AND OBJECTIVES ARE MOST IMPORTANT
During cabinet expansion, not all ministers were asked to leave due to underperformance. Some have been replaced to achieve specific goals.
Likewise, if you are on the verge of reaching your goal, start slowly exiting your investment in stocks. Don’t delay because stocks are doing well. Greed could prove costly. Keep your purpose and investment objective beyond returns.
CHOOSE PRODUCTS ACCORDING TO OBJECTIVES
Every new minister that the NDA government inducts has a purpose. Each minister is chosen with a specific objective in mind. Likewise, investors should be particularly careful about the products they wish to use to achieve their goals.
For example, don’t start investing in technology mutual funds because they offer better returns than diversified equity fund classes. Have a clear goal of choosing each product.
AT THE HEART OF PORTFOLIO BUSINESS
The ministers at the head of important portfolios were not affected in the cabinet reshuffle. Likewise, investors need to have a solid core portfolio that will help them in the long run. The few funds in the core portfolio should be stable, diversified and have a strong track record.
For example, if you created an index fund as part of the core portfolio, you might not need to change it unless the system continues to have a high tracking error.
(Do you have personal finance questions? Send them to [email protected] and get answers from industry experts)
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