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Dwaipayan Bose simplifies the whys and hows of revisiting your financial goals
The start of the new financial year is a good time to review your goals and find out if your financial journey aligned to those goals is on track.
Revisiting your goals annually keeps your investment on track and allows actions to be taken for discrepancies that might have cropped up during the course of the past year between your goals and the investment plan.
Why you should review your goals annually?
Your financial situation does not remain the same throughout your life. There could have been many changes in your financial position or family goals in the past year; for example, any addition in the family by virtue of marriage or child birth or any new goals like buying a house, or a car, or planning for a foreign trip.
You should also remember that as your income grows, either due to annual increment or promotion, your lifestyle is also likely to change.
Lifestyle changes usually imply higher expenses and you may have to revise your long term financial goals accordingly.
In order to ensure that your investments remain aligned to your financial goals you should review your investment portfolio annually and make the necessary adjustments.
Ask yourself the following questions when you revisit your goals:
If the answer to any of the above questions is a 'No', then you need to make the necessary adjustments to your financial plan to see that the answers become positive. The outcome of this exercise should be your savings and investment target for the year.
You can take the help of a financial planner to review and revise your financial plan according to your financial goals.
How to monitor your portfolio performance?
1. Fund Performance Vs the Benchmark: Check the performance of the schemes against its market benchmark index. Benchmark index is a market index, against which the scheme's performance in measured. Active fund managers aim to beat the benchmark index.
Accordingly, you should expect your actively managed schemes should beat the benchmark index over sufficiently long investment periods.
In times of high volatility, you should be prepared for some deviations in performance. However, if your mutual fund has consistently performed below the benchmark, then it is time to review and reassign your investment to schemes that have a better performance track record.
When you are reviewing your equity scheme’s performance versus the benchmark's performance, you should look at performance over minimum three year investment tenure.
2. Fund rolling returns Vs the Benchmark: One of the drawbacks of Point to Point Returns is that they are biased by prevailing market conditions or conditions prevailing over a certain block of time (point to point period).
Point to Point Returns do not provide insights into consistency of fund's performance in different conditions or volatility of the scheme.
Rolling returns are the most unbiased measure of a scheme’s performance, since they show the scheme's returns over specified investment tenures across all market conditions e.g. bull market, bear market, range bound market etc.
For equity funds, you should choose sufficiently long investment tenures or rolling returns periods (3-year, 5-year period, etc.).
Rolling returns will provide a visual representation of how the scheme performed in different market conditions versus its benchmark index. The different rolling returns statistics like average, median, maximum, minimum, etc., will provide quantitative insights into the scheme's performance across market cycles.
The rolling returns distribution over different return ranges will give you statistical information on the consistency of the scheme's performance across market cycles. New investors may find rolling returns conceptually difficult to grasp, but we urge investors to understand and use rolling returns to evaluate scheme performance.
3. Review of portfolio risk -- Asset Allocation: Mutual fund investors often give excessive importance to returns and ignore risks. Risk and return are both integral parts of investing; in fact, the two are interrelated. One of the most important steps of portfolio review is to find out if the schemes that you are investing in are aligned to your risk appetite and your financial goals.
Your risk appetite may change due to various reasons like change in life-stage -- marriage, childbirth, parent's retirement, child going to college, other stage of life goals drawing closer etc.
Asset allocation can ensure that the risk profile of your investment portfolio is aligned with your risk appetite.
Different asset classes, for example, equity, debt, commodities, etc., have different risk profiles. Asset allocation refers to spreading your investments over different asset classes to balance risk and return.
Mutual funds provide solutions for different asset classes -- equity mutual funds, debt mutual funds, hybrid mutual funds, gold/silver exchange traded funds (ETFs) or gold/silver fund of funds, international mutual funds etc.
Asset allocation can also apply to investments in a certain asset class. For example, in equities, large cap, midcap and small cap funds have different risk profiles. You should invest according to your risk appetite and take the help of a financial advisor if required.
Your asset allocation can change even if your risk appetite has not changed. Different asset classes have different growth rates in different market conditions. For example in a bull market, equity returns will be high and the percentage of equity in your asset allocation will grow relative to debt.
An important outcome of asset allocation review can be the need to rebalance your portfolio to ensure that the asset allocation is as per your financial plan. For example, if your equity allocation is too high relative to your risk appetite, you can consider investing more in debt funds or vice versa to rebalance your asset allocations.
4. Review if your mutual fund portfolio is over-diversified: Many a times we invest in some schemes based on the scheme's or category's or sector's short term performance. Over a period of time, we may end up investing in a large number of schemes. This may lead to over-diversification.
Investing in a large number of schemes does necessarily create more diversification; on the contrary, it may create inefficiencies in your portfolio. The beginning of a new financial year is the time to do a spring cleaning of your portfolio. Review all your mutual fund schemes and try to rationalise your schemes, if required.
5. Disciplined self-assessment: Sometimes investors complain to their financial advisors or mutual fund distributors that their portfolio's actual returns were not satisfactory even though market and scheme performance was good.
Your actual returns will depend on your actions. If you redeemed your mutual fund units when the market fell or if you booked profits at certain levels, your actual returns may not be reflective of how your schemes performed.
Another reason for unsatisfactory portfolio performance is liquidating your long term investments for short term needs -- redeeming units of your equity funds for Diwali (or any other festival) shopping. Lack of discipline in your SIPs (insufficient balance in your bank account) can be another reason for unsatisfactory portfolio performance.
Get a consolidated account statement (CAS) from the Registrar and Transfer Agent (RTA) and go through all the transactions -- do a self-assessment of what could have been avoided with better planning and discipline. This self-assessment will make you a more aware and disciplined investor.
Consult with your financial advisor if required. A disciplined investor is much more likely to achieve his/her financial goals than an investor who lacks discipline.
6. Continue your SIPs/step up SIPs: If your SIP has stopped either due to insufficient balance for three or more consecutive months or if your fixed period SIP tenure is over, you should evaluate whether you want to continue your SIP for your long term financial goals.
SIPs are meant for long term investment goals and should not be stopped or redeemed based on market movements or to meet short term requirement of funds.
With rising income, your lifestyle also changes. You may consider investing through step up SIPs to increase your investments in line with increase in your income to ensure that you can maintain your lifestyle even after retirement or reach your other long term financial goals faster.
7. Tax Planning: You need to know your tax obligations for filing your income tax returns for the current assessment year (AY 2024-25). Go through all your mutual fund transactions done in FY 2023-24/AY 2024-25; compute the capital gains (short term or long term) and your tax obligation.
If you have received dividends, then the same should be added to your income and taxed according to your income tax rate. Also start your tax planning for FY 2024-25/AY 2025-26 now, if you are in/want to opt for the Old Tax Regime.
Do you have investment related questions? Ask rediff's Money Gurus HERE.
Disclaimer: This advisory is meant for information purposes only. This advisory and the information in it does not constitute distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article or an attempt to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Dwaipayan Bose leads content production and mutual fund research at 