ARE INVESTMENT PORTFOLIO REVIEWS A NECESSITY?

The answer is yes if there are changes in interest rates, corporate governance and during sudden highs in returns.

For many investors, taking a call on exit is tougher than investing in an instrument. The  task gets more challenging when other instruments provide better returns or the stock or the asset underperforms for a long time. Even otherwise, an investor regularly needs to assess strategies and review portfolio at regular intervals. Then what should be the trigger points for a course correction? Here are some key reasons for a review of strategy. 

A significant change in interest rate scenario: History has shown that an uptrend in interest rates has always spelt doom for other assets such as equity and property. Low risk investors and short term investors can make use of it by pushing up their allocation to debt during such times. A classic example has been the trend in equity during 2011-12. While the broader indices generally underperformed or even gave negative returns, debt funds or FDs managed to provide double digit returns during the same period.
 

Now with interest rates showing signs of cooling down (though not very significantly), an investor can still have 20-25% in favour of debt or income funds. Those targeting an annual return of 10-12% from their portfolio can still allocate a sizeable percentage to this product.

When corporate governance takes a hit in the case of your stock: Since 2008, investors have been made to grapple with a financial crisis not just of broader markets but of their individual stocks too. There have been many Satyam episodes over the years and Kingfisher Airlines is the latest to join the infamous bandwagon. An investor who has such stocks in his portfolio for long term needs is better off liquidating them rather than wait for their turnaround. It is hard to visualise Mahindra Satyam regaining its earlier highs in the foreseeable future and so is the case with Kingfisher.

When portfolio delivers superlative returns in quick time: This is more applicable in the case of equity and on certain occasions, with income/bond funds. Investors can get lucky with whopping returns when their timing is right. However, history has shown that such superlative returns get averaged out as annual returns in excess of 20-30% are not sustainable in the long term. For example, in 2007, a client of ours made a clean profit of Rs 10 lakh on an investment of Rs 25 lakh in less than 6 months! 
But the quantum of profit has remained the same even after five years. 

An exit at earlier levels and re-entry or switch to even liquid funds would have enhanced the overall returns. But lack of such actions has robbed the investor of desired results. If you don’t want to be in those shoes, get realistic with your strategies and return expectations.