Mutual fund investments have taken up a special place in the investment portfolios of several retail investors in the past few decades. However, lack of financial literacy and deficiency of fundamental workings of mutual fund schemes along with deceptive financial recommendations often end up with a disastrous ending – an investor owing a cluttered mutual fund investment portfolio which consists of duplicate investments, underperforming assets, etc. If you own one such investment portfolio, do not worry, we have got you covered. In this article, we will understand how you can clean up your investment portfolio.
Revisit financial objectives
Financial objectives refer to the sum of money needed to attain certain personal goals of an investor’s life such as home loan down payment, saving for retirement, child’s higher education plans or marriage, etc. You can begin by assessing a monetary value to each financial objective and then factoring in with an appropriate rate of inflation. It might be a good idea to also consider the tax implications on your mutual fund investments. You can calculate mutual fund returns or understand the future value of your mutual fund investments using a mutual fund return calculator.
Choose your asset allocation strategy wisely
Several investors get easily influenced by market sentiments or by the recommendations of their friends or family while making an investment decision. However, one may understand that a type of investment that might be ideal for your friend may not be a suitable investment option for your investment portfolio. This is because not everyone has the same financial goals, investment duration, risk profile, and other parameters which are unique to their investment portfolio. The first step towards remedying this investment decision is by adopting the right asset allocation strategy for your portfolio. Asset allocation is an investment strategy where in an investor aims to strike the right balance between risk vs returns by diversifying their investments across different types of asset classes like debt, gold, equities, cash equivalents, etc.
Decipher underperforming assets
Even while your current investment options match your financial goals and asset allocation strategy, there might be a few types of investment that are constantly underperforming against their benchmark indices and peer funds. It is important to identify such underperforming funds in your investment portfolio and redeem these mutual fund investments. Hence, it is a good habit to review your mutual fund investment portfolio regularly and frequently.
Restructure your investment portfolio to meet your financial objectives
Restructuring your investment portfolio is as important as following the right asset allocation strategy or identifying underperforming funds. Compare the past performance of your desired mutual fund schemes that align with the objectives of your investment portfolio over different periods say 1 year, 2 years, 3 years, 5 years, and 10 years against their underlying benchmark indices and peer funds belonging to that same mutual fund category. This will help an investor in understanding if their mutual fund schemes are constantly underperforming or outperforming their peer funds and benchmark indices across different market cycles and different market conditions.