Personal Finance: Mid-year review of your portfolio

Personal finance guide: You can perform a mid-year portfolio review in five easy and simple steps. These include
With so many investment options available, creating a personal finance portfolio is not difficult. (For representation)
With so many investment options available, creating a personal finance portfolio is not difficult. (For representation)
Updated on Sep 12, 2021 09:00 PM IST
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By Abeer Ray

With so many investment options available, creating a portfolio is not difficult. But, for your money to grow, you need to be aware of investment trends and factors that affect money growth. It is important to constantly assess and evaluate if the money invested is growing at the pace originally envisaged. However, this entails a continued analysis including a mid-year review of the portfolio. You can perform a mid-year portfolio review in five easy and simple steps. These include:

Adopt a long-term approach

Ignore quacks that promise you double returns within a month. Building a portfolio with a long-term approach and adopting the same approach while reviewing it is necessary. While recent times may have turned your attention to having an emergency fund or enough money in your savings accounts to meet treatment expenses, investing with the intent to secure your long-term financial future should be the aim. Market movements may take a toll on certain investment options that had seemed lucrative otherwise. Long-term investment options include equity-type investments like stocks and real estate. Understand the market dynamics involved in the working of any and every fiscal instrument. For example, debt instruments provide security but do not beat inflation. Choosing to invest in equities through Systematic Investment Plans (SIPs) ensures regular investment in the market. This will also save you from the hassle of timing the market before entering and exiting it.

Hedge risks

The extent to which your choice of investments will behave in the long run depends on the quantum of risk associated with them and whether they have been shielded against sudden market movements or unforeseen events like the recent epidemic. A unique way of hedging risks can be through insurance. Similarly, investments must also be insured by securing an emergency fund to meet contingencies. To ensure complete financial security, you must take care to diversify your investments. A well-diversified portfolio contains stocks, mutual fund investments, fixed-income instruments, sovereign gold bonds and a bit of real estate.

Financial goals

Investments are made keeping financial goals in mind. Depending on your risk appetite and desired earnings in the long run, you can put your money into equities and debt instruments. Besides, you must consider factors including market volatility, changing interest rates and sporadic monetary guidelines by the government while investing your money. For example, a few years back, Unit Linked Insurance Plans (ULIPs) were preferred despite a part of the premium being dedicated to life cover owing to its tax exemption option. However, change of rules allowed exemptions from tax only for ULIPs with yearly premium up to 2.5 lakh per annum. This prompted many to shift their investments to mutual funds subject to the same tax slabs. However, in the latter, the entire money was invested in equity or debt without the burden of the added insurance cover.

Tax implications

Investments, insurance and tax-saving measures are distinct from each other. While reviewing your investment portfolio, check if you have availed of the tax-saving opportunities too such as paying for tax-saving fixed deposit receipts, public provident funds, equity-linked savings schemes, etc. Start checking at the portfolio level and then move on to individual investments to check which earn good returns. While saving on taxes is important, the focus must always be on investments that earn high returns and not choosing those that promise tax benefits but give low returns. While reviewing possible returns, compute the potential tax burden too to calculate the post-tax returns.

Change asset class

There is nothing fixed about assets. If circumstances indicate the possible need for enough cash in the future, choose investments that can be easily liquidated. Opt for simple money market instruments like accumulating money in savings accounts or parking some amount in fixed or recurring deposits. You can put some money in extremely short-term investment options too.

Personal Finance is a weekly feature that aims to provide our readers pertinent and helpful financial information.

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Friday, October 22, 2021