Portfolio Management – Objectives, Importance, Process, Risk Profile

It is great that you have made some investments. Now, it is important to ensure that you get the maximum out of them. For that, an active interest from your side to track and manage your financial portfolio is mandatory. Initially, it may not come easy to you. But by following these 10 tips, we hope you will find portfolio management and easier and interesting. 

Diversification is essential

A tried and tested ways to evade or minimize losses as much as possible is to keep your investment portfolio well-diversified. A good mix of equities, debt securities, and money market instruments – so that when one underperforms, the rest can make up for it and negate the loss. Diversification is instrumental in keeping the portfolio healthy.

Get a grip on expenditures

At the risk of sounding granddad-ish, we reiterate that a rupee earned is a rupee saved. Do not just check the past returns, keep an eye out for expense ratios and other charges too. There are other ways to cut down costs. For instance, if you are not interested in direct plans, go for an intermediary that levies a flat fee rather than frequent commissions per transactions.

Understand your risk profile

How much risk can you take? A million dollar question, indeed! It mainly depends on your age – to determine what is your investment horizon – and current income. Say, if you are of age 30, your investment horizon is 30 years (assuming that you plan to retire at age 60). You can afford to stomach more risk than somebody in their 40s or 50s. How much money are you comfortable shelling out towards investments every month? Have you considered prospective losses? Remember, share market is associated with risks and you must invest only if it doesn’t land you in a deeper pit when there is a market low.

Start at a young age

Age is not just a number when it comes to investing. It is natural to want to enjoy your newfound financial freedom when you are fresh out of college and has just started earning. However, financial experts cannot stress enough on the importance of starting early and having a wide investment horizon. The younger you are, the more mental and emotional stamina you will have to bear higher risks and enjoy bigger returns.

Understand debt and equities

At every phase of financial planning and investing, you will have 3 choice – debt, equity or a mix of both. Example, bonds are debt schemes that promise capital protection while paying you a steady income (albeit low returns). Money market instruments like FDs too offer lower returns but keep your capital safe. Putting money in equities, instead, make you an owner of the portion of the company – the share you ‘bought’. If the company does well, you will mint money like anything as dividends or corpus. And if the profit falls, so will the returns.

Study the market and observe some more

If you are new to investing, it is prudent to keep a bulk of your investments in debt and money market securities at first. Equity investments are for those well-versed with finance market. Knowing the trends can help you make an informed decision. Remember that equity takes long-term to give you maximum benefits.

Having and sustaining discipline is the key

For a portfolio to grow towards its fruition, it needs to be ‘fed’ regularly. Some months may be good and you may have no problem shelling out the decided amount towards your investment. Some months may leave you financially-crunched and it can be tempting to skip or withdraw. One way to manage this is to automate payments to be made at the beginning of the month (salary day). This will enable you to plan your monthly finances better. These savings will be your lifeblood in case of contingencies like a job loss or medical emergency.

Don’t invest and disappear – check the progress regularly

Yes, you have opted for regular funds and have an intermediary looking after the portfolio for a fee. However, it doesn’t absolve you, the investor, of all responsibilities. Keep tracking your company’s market position and learn when to cut losses and switch. Be aware of company news alerts, profit announcements and company’s general mission.

Leave emotions and impulsiveness at the door

When one investor panics or becomes overconfident, it often means good news to another. Because when you are either, you tend to make decisions you will regret. One common example is when investors impatient to make the most of the current positive market situation borrows heavily to invest. This is a big mistake as it can lead to the double burden of loss as well as paying off dues. Keeping a cool head even when others get anxious or greedy can be advantageous to you in making non-biased and sharp decisions.

Don’t forget tax

Mutual fund gains are subjected to taxation. Long-term gains from debt funds (3+ years) are taxed at 20%, while short gains are added to your current income. So, you should remember to take this into consideration when you are in the planning phase. For instance, ELSS is the only tax-saving mutual fund in India as per 80C. In a nutshell, managing portfolio is an art. But it also needs a scientific and detached approach – a game that needs you to apply heart and brain with the same vigor. If all this seems too much for you, investing with Cleartax Invest can offload a major portion of responsibilities. We have handpicked funds from top fund houses, selected based on your risk profile and requirements. Start investing.