It's been quite a journey for equity markets in recent times. Notwithstanding the occasional bouts of volatility, by and large markets have moved in just one direction -- northward. Not surprisingly, we have received a large number of queries from investors enquiring what they should do. Our response has been quite simple -- don't get carried away by the rising markets; continue to make investments in line with your predetermined investment plans/objectives and in sync with your risk profile.
However, there is another strategy that is apt for present times. Now is the time to cleanse your portfolio. By cleanse, we mean free your portfolio of unwanted investments. So what constitutes an unwanted investment? Simple, any investment that doesn't suit your risk profile and will not help you achieve your financial goals. Also worth cleansing are investments that didn't quite work out as you were first led to believe by your investment advisor.
If you were to take a good hard look at your portfolio, there's a more than fair chance that you will find investments of the unwanted variety. Given the unprecedented uptick in equity markets, now is an opportunity to shed them and that too at a profit. Let's take a look at what investments would typically qualify as unwanted ones.
1. Sector/thematic funds
Sector/thematic funds are known to deliver over shorter time frames when the underlying sector/theme hits a purple patch. Over longer time frames, such funds are known to lag well-managed diversified equity funds. Furthermore, sector/thematic funds are high risk avenues that are suited only for informed investors who have a view on the underlying sector/theme. Such investors can time their entry into and exit from the fund. Uninformed investors (who constitute a bulk of the investing population) are better off investing in conventional diversified equity funds. Now would be a good time to exit an investment in a sector/thematic fund.
2. New fund offers (NFOs)
Over the last few years, at some point, most investors have fallen prey to their agent/investment advisor's persistent NFO selling spree. Remember the NFO that your agent promised was the next big investment opportunity and urged you to invest in; while the agent succeeded (read made a fat commission), you lost in the process (read saddled with a lackluster investment). It's likely that you are invested in more than one such NFO that you should have steered clear of in the first place. Now would be a good time to discard such NFOs from your portfolio.
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3. Funds that don't match your risk profile
Say, you are an investor with a moderate risk appetite, and your portfolio is saddled with funds of the high risk variety. Clearly, such funds don't match your risk profile and therefore shouldn't find a place in your portfolio. On a positive note, high risk funds are likely to be top performers in the present scenario. This in turn provides you the opportunity to get rid of such unsuitable funds at a profit. Don't succumb to the temptation of staying invested to clock more gains. Instead make use of the fortuitous break offered by markets.
4. Funds that have 'run their course'
There are some funds that can be (rather crudely) referred to as spent forces; such funds have a tendency to be laggards on most occasions. Typically these funds have lost their focus, as a result their positioning and investment style is routinely revised. Alternatively, these funds have fallen out of favour with their fund houses on account of factors like their investment themes (which are no longer the flavour of the market) and no longer receive the requisite attention. Also, it's possible that a churn in the fund management team may have played a role in the fund's poor showing. In any case, the result is that the fund is no longer a worthy investment proposition. Now is as good a time as any to exit such a fund.
Finally, you would also do well to engage the services of an honest and competent financial planner to help you review your portfolio and incorporate necessary changes therein. Remember that its one thing to find yourself in the midst of rising markets and quite another to be able to use them to your advantage.
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