Come festive season, we all love giving our homes a fresh makeover — from deep cleaning to redecorating or even a full renovation. It’s our way of welcoming new beginnings. But have you ever thought your investment portfolio could use the same treatment? After all, what better time than the festive season to refresh your finances too?
In this article, we will explore how to evaluate, diversify and rebalance your portfolio during the festive season, while also considering tax efficiency and long-term goals.
Table of contents
Research, research, research
Research is the foundation of any financial decision taken. Unless you have gathered proper information about the past performance and potential risks of different investment vehicles, how would you know if the one you are choosing is most suited to your unique goals and objectives?
Thus, it is considered imperative to understand the business you have invested in. Before investing in a stock, you could research what a company does, its products, customers and what sets it apart. Next, you may review its financial health. Look for steady revenue, profits and manageable debt. Use simple ratios, such as P/E, Debt-to-Equity and ROE, to compare performance within an industry.
Past performance may or may not be sustained in future.
It is also advised to study the industry itself; even seemingly stable companies may struggle in weak sectors. Lastly, you could check the leadership as that may impact the future success of the company. By combining business insights, financial checks and industry trends, you may build confidence and make potentially more informed, long-term investment decisions.
Moreover, if you are investing in a mutual fund, it might be important to assess the past performance and see how the fund performed across various market cycles. Also, you may want to evaluate whether the fund objectives and mandate align with your personal goals and risk appetite.
Past performance may or may not be sustained in future.
Also Read: How to Rebalance Your Portfolio with Small Cap Funds
Evaluate your financial goals and risk appetite
Every journey has a destination. You may begin your financial journey by determining the investment goal you want to work towards. As an investor, it is considered important for you to know if your goal is short-term, medium-term or long-term.
- Short-term goals might be buying a car, planning a holiday or creating an emergency fund.
- Medium-term might be children’s education, down payment for a house.
- Long-term might be retirement planning or legacy planning.
Another aspect that you may have to evaluate while rebalancing your portfolio is your risk appetite.
- If you prefer relatively stable options, you might allocate more to debt instruments.
- If you are comfortable with fluctuations in the short to mid-term and are aiming for potential wealth creation, equity exposure may be considered.
- For balanced investors, a mix of equity, debt and other assets may be suitable.
Diversify your portfolio
You must have heard the phrase: ‘Don’t put all your eggs in one basket’, but do you practice it while drafting your investment portfolio? Diversification means spreading investments across multiple asset classes, sectors and even geographies to avoid concentration risk.
During festivals, investors may get tempted to put large sums into one instrument, such as gold or equity. However, it has been observed that a diversified approach often helps in balancing potential returns and risks. Hence, it may be appropriate to diversify the portfolio into small cap, mid cap and large cap funds, balancing between equity, debt and other asset classes at the same time.
Invest in high-quality stocks
Many of you may confuse high-quality stocks with the stocks of large companies. However, this is not always the case. High-quality does not necessarily mean large cap only, it means companies with consistent earnings track record, transparent governance policies, low debt-to-equity ratios and long-term business sustainability.
During the festival season, investing in fundamentally strong businesses rather than chasing trends may align better with long-term goals.
Consider Systematic Investment Plans (SIPs)
Little drops of water make the mighty ocean. This tends to hold true for the investment world too. By investing little amounts regularly through Systematic Investment Plans (SIPs), an investor may potentially create a substantial corpus fund over time. SIPs are a disciplined way to invest in mutual funds. The power of potential compounding may help your investment potentially grow over a long horizon.
Rebalance your portfolio
Rebalancing means adjusting the proportions of different asset classes in your portfolio to keep them aligned with your risk appetite and financial goals. To simplify it, let’s suppose your equity exposure has grown as the market rises. In such a case, you may rebalance by moving some gains to debt. On the other hand, if debt allocation has become too high, you may increase equity exposure.
To rebalance, you may either trim some of the assets that have potentially grown and redirect funds to the weaker ones or add fresh investments to the underweighted asset classes.
Plan for tax efficiency
Doing proper investment but ignoring tax planning may not be a wise approach. Tax planning and investments tend to go hand-in-hand. Both long-term and short-term gains are taxed, albeit at different rates for different asset classes. Also, by investing in Equity Linked Saving Schemes (ELSS), you may be able to save on taxes under Section 80C of the Income Tax Act, 1961.
Moreover, tax efficiency is not only about saving taxes but also about choosing options that align with your financial goals. Consulting with a tax adviser may help ensure compliance and choose options aligned with your goals and personal situation.
Stay disciplined and avoid emotional decisions
While it is advisable to rebalance your portfolio during festival season, the typically optimistic sentiments during festivals may also amplify due to market fluctuations. Some investors might feel overly enthusiastic and allocate more than necessary to equities. Others may feel cautious and hold on to excess cash.
A disciplined approach may involve sticking to a well-researched asset allocation plan and avoiding herd mentality. Discipline is what often tends to differentiate consistent investors from those driven by short-term emotions.
Consult financial experts
Not every investor may be an expert in understanding market dynamics. And, that is understandable. If you feel uncertain about how to rebalance or select instruments, consulting financial experts may be helpful. Registered financial advisers or mutual fund distributors may guide you in this regard.
Also Read: What is a balanced portfolio in mutual funds?
Conclusion
The festive season is often a time of celebration, new beginnings and fresh investments. While it may be easy to get carried away by emotions, rebalancing your portfolio thoughtfully during this auspicious period may keep you aligned with your financial goals. This might help your financial journey stay on track.
FAQs
What are the benefits of investing during the festive season?
The festive season may often motivate disciplined financial decisions. It may also coincide with surplus bonuses and special offers from financial institutions.
How can I assess my risk appetite before investing?
Risk appetite may be assessed by evaluating how much volatility you are comfortable with, your income stability and your financial goals.
What are Systematic Investment Plans (SIPs), and how do they work?
SIPs allow you to invest fixed amounts at regular intervals in mutual funds. By spreading investments over time, SIPs help average out the overall cost of investment, manage volatility, and encourage disciplined investing.
Why is portfolio diversification important?
Diversification spreads risk across asset classes. If one asset underperforms, others may potentially balance it out, thus mitigating overall portfolio risk.
How can I ensure my investments are tax-efficient?
By understanding the tax treatment of equity, debt, gold and real estate and aligning them with your goals. Consult a tax expert when in doubt.
What should I do if I feel overwhelmed by market volatility?
Continue with your investment plan, avoid making sudden changes and focus on long-term goals.
How can financial experts assist in my investment journey?
Experts may provide guidance on asset allocation, risk assessment and portfolio reviews. They may also help you optimise your tax outgo on your investments.
Is it advisable to make lumpsum investments during Diwali?
Lumpsum investments may be considered based on financial goals and risk appetite. However, it is notoriously difficult to time the perfect entry point. Hence, staggered SIPs are usually recommended for new investors.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed.The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.
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