Detoxification of investment product portfolio is a process of cleaning the product portfolio inside out of some toxins (Bad elements) the presence of which may damage your overall returns and thus affect the achievement of optimal returns and goals.
Just like the process of detoxification of body where blood gets cleaned and toxins are processed for elimination, in this process also portfolio impurities are pointed out and cleaned or removed completely. After all, good health is always a necessity be it physical or financial.
Why there’s need to detoxify investment product portfolio?
We are emotional – in the sense that we are always ready to help people near us like our friends, relatives, bankers in achieving their job targets, by purchasing investment products without understanding the impact of those in our financial lives.
We are greedy – tell us where we can make more and easy money, we are always ready to invest in that.
We are irrational – We are suffering from various behavioural biases. We value reward more than risk, we tend to take decisions on the basis of recent events/experiences and we love to move and invest around with groups.
These behavioural biases lead us to a bad unsuitable investment portfolio, which if not acted upon and detoxified soon may lead your finances into a big trouble later on. (read: work on your investment behaviour)
Some steps to detoxify your investments product portfolio
1. Investment Objectives:
This is the first and foremost step which helps you to understand the reason behind your investments. I have met many people who after investing in a particular instrument either under obligation or ignorance gives a reason “ Chalo…baccho ki shaadi mein kaam aa jaenge”…and this way they keep on accumulating many unwanted investment products in the portfolio.
When while purchasing you have a clear vision in your mind then you could be able to select the right vehicle, the right product for a defined goal.
Check out all your investments and see if they are matching with any of your goal or you are just continuing with them to justify your decisions which actually were bad ones.
2. Asset Allocation:
After setting onto your objectives you have come to know that what amount you require and when. Now is the time to understand the Asset classes, the risk-return parameters and selecting among them for your targeted goals.
There are commonly 4 asset classes in India where you can invest in- Equity, Debt, Gold and Real estate.
Equity and Real estate are the riskiest ones but having the potential to deliver good returns in long term. (Read: What is Equity?)
The same way gold and debt comes in the safe asset options. (Read: Why should debt be a part of your long-term portfolio?)
The time frame of your investments, your risk taking ability and your current financial ability will help you select the suitable and best mix of the asset class. Your investments should be balanced between these assets keeping in mind the risks, returns and objectives.
Now for detoxification purpose, find out the exact assets allocation of your current portfolio.
Find out the equity exposure through ULIPs, equity mutual funds etc. , debt exposure through FDs, FMPs, NSCs, PPF, EPF etc. , Gold through jewellery, ETFs and real estate through Physical and PMS vehicle.
Then see whether it is tilted towards any particular risky or safe category. It should suit your objective and not only to your emotional satisfaction.
3. Diversify your investments:
Once you have decided on the asset class now is the time to select investment vehicle and while selecting the same you should understand the value of diversification.
To diversify in its true sense mean to give variety. Invest in different sectors and industries which don’t relate to each other, to distribute (investments) among different companies or securities in order to limit losses in the event of a fall in a particular market or industry.
Many people invest in a large number of Equity Mutual funds without understanding the investment objective and style of the fund and give it a name of diversification.
But going a bit deeper into such portfolio one finds that all the funds are almost same. A very common example to it is the investment in HDFC top 200 and HDFC equity. Many portfolios carry both of these funds, which in turn are almost the same, in investment style, objective and even in Fund Manager. (However w.e.f June 2018, with the new categorization of funds, things are expected to change)
Besides equity even if we talk about debt then also diversification plays an important role. It’s not wise to keep all your investments in the fix interest-bearing instrument, you should also expose your investments to tradable NCDs, open-ended debt mutual funds which trade in the debt securities and is very much advantageous in the falling interest rate scenario. (read: bank deposits vs debt mutual funds)
4. Come out of your insurance-linked investment plans
When we are talking of investments product portfolio we’ll talk about investment portfolio only. There’s no scope of insurance into it.
Insurance is an expense, though a very important expense. From Financial Planning point of view, no one should avoid getting adequate coverage. But once adequately insured no other expense related to it directly or indirectly should be done by you.
These insurance-linked investment plans are very bad for your investments products portfolio as these are very expensive products. So better late than never, sit with your financial planner, make a list of all of your policies and find out the suitability in your profile. Understand the value of money and its opportunity cost and surrender all the not required plans to cleanse your portfolio completely.
The above steps can also be followed by the first timers to design the suitable investment portfolio. Repeat this exercise once every year to ensure that your investment portfolio is well positioned to meet your long-term investments objectives.
Go ahead….get a financial health check-up and detoxify your investments product portfolio and keep your finances always happy.
