With small & midcaps outperforming, direct more money to largecaps: Experts

Rebalancing by allocating more to an underperformer will help you avoid tax liabilities

Financial experts recommend reviewing one’s financial portfolio annually. December is a good time to carry out this task so that you can hit the ground running at the start of the new year.

Adhil Shetty, Chief Executive Officer (CEO) of Bankbazaar, says, “A periodic review allows for necessary adjustments, be it portfolio rebalancing, changing asset allocation, or setting new financial targets. Such fine-tuning is essential to get optimal returns in line with one’s financial aspirations.”

Check progress against goals

Begin the year-end review by assessing whether your portfolios are on track to achieve your life goals. Jay Thacker, member of the Association of Registered Investment Advisors (ARIA), says, “Check for progress towards specific milestones and adjust your strategies if required.” If, as a result of market developments, it appears that a portfolio may not reach the targeted amount, you may need to invest more.

Next, revisit your goals. Deepali Sen, Founder and Partner of Srujan Financial Advisers, says: “Reviewing your goals annually allows you to identify new goals that may have emerged or drop older ones that have become irrelevant. This exercise may in turn require changes to the amount invested and to timelines.”

Asset allocation out of sync?

Equities were the best-performing asset class of 2023, followed by gold. Within equities, smallcap funds outpaced both midcap and largecap funds.

When the markets scale new highs, many investors tend to book profits, with the aim of re-entering when they. This is an exercise in market timing, something that is almost impossible to pull off regularly. Ajinkya Kulkarni, Co-founder and CEO of Wint Wealth, says, “It is impossible to predict which way the markets will go in the future. Hence, investors should stick to their original asset allocation and rebalance if they have become overweight on any particular asset class.”

To avoid tax incidence, allocate more money to this year’s underperforming asset class (debt) and sub-asset class (largecap fund), instead of selling a portion of the outperforming asset class.

When deciding on your asset allocation, pay heed to the time horizon. Sen says, “Invest in short-term debt funds if your horizon is less than two years; medium-term debt funds, hybrid funds, or multi-asset funds if it is two to seven years; and equity funds if it is more than seven years.”

Besides investment horizon, your risk appetite should also play a part in determining asset allocation.

Turn cautious if you are approaching a long-term goal, such as your child’s college education. When you are about three years away, start moving the corpus from equity to debt so that upheaval in the equity market does not jeopardise the goal.

Check for laggards

Next, evaluate the performance of individual funds. “Compare each fund’s performance against its benchmark and category average return. Just looking at absolute return will not provide the right picture,” says Mrin Agarwal, Founder and Director of Finsafe India.

One simple way to assess performance is to focus on long-term return (seven- or 10-year return). If this figure dips below the benchmark return, put the fund on your watch list. If the underperformance continues for five or six quarters, exit.

In addition, look up your funds’ risk-adjusted returns and volatility (compare against category median).

Assess whether you need to invest more in a particular asset class or instrument to hit your goal. Kulkarni says, “Unless there is a fundamental flaw in the investment instrument, churning every year is not helpful. Instead, focus on changing the investment amount, which is within their control.”

Tweak plan based on life events

The financial plan may have to change based on life events. For example, once a child is born, parents must start investing for her college education.

Sometimes, people receive a windfall. Agarwal says, “Allocate the money among the existing investments.”

At times, money meant for one goal gets used up for another. In that event, direct more money towards replenishing the depleted portfolio.

Sen adds, “Finally, review expenses to ensure that you are adhering to your budget.”