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What do we understand by a portfolio health check?
05 Jan 2023

Like your health requires regular medical check-ups so also does your portfolio require regular check-ups. But how exactly do you do a medical check up? What do we essentially understand by portfolio health check up? What is the importance of portfolio management and portfolio rebalancing? Above all, what is mutual fund portfolio management all about?. Today there are a lot of black box models to do a portfolio health check. While we will not get into the merits and demerits of these black box models, what is more important for you is to understand the key questions that you need to ask yourself as part of your portfolio health check. That will explain the process of portfolio health check much better..

1.  Is the portfolio in sync with the market conditions
What does this mean? You obviously want your portfolio to generate wealth in the long term. But it is also essential that your portfolio reflects the market realities. When the stock markets are quoting at a P/E of 11 then it is a historical low. At that point your portfolio must predominantly be invested in equities. Similarly, when you expect bond yields to fall in the market there is a portfolio portion that must benefit from long dated debt. Portfolio health check ensures that your portfolio is in sync with the realities. For example, you do not want to be overexposed to equities at a time when there is a global meltdown coming or when global growth is faltering. This is how the sync is created!

2.  Is the portfolio in sync with your risk profile
Your risk profile is judged by a number of factors. For example, with advancing age your exposure to equities need to come down and your exposure to debt needs to increase. Similarly, as you approach your milestones you need to ensure that you gradually keep shifting from equity towards debt. Similarly, as you take more insurance cover your risk appetite increases and as you repay your liabilities your risk appetite gradually increases. Your portfolio health check should reflect this changed reality.

3.  How the asset mix is shifting as your plan progresses
This is in a way a corollary of the previous point. Your asset mix consists of equity, debt, liquid assets and gold. How do you shift this asset mix? Firstly, with advancing age you move more towards debt and away from equity. Secondly, as your goal milestones approach your asset mix must shift first towards debt and then towards liquid assets so that the liquidation costs are minimal. Thirdly ,your portfolio health check needs to be open to new asset classes like REITS, InvITs, structured products which can give you the required alpha.

4.  What is your portfolio’s sensitivity to external stimuli
What do we understand by external stimuli. Let us assume that your debt portfolio is predominantly tilted in favour of long maturity debt. That makes your portfolio extremely vulnerable to a rise in interest rates, especially considering that is what the RBI is planning. When you debt is long maturity, any rise in rates means that it will have a disproportionate impact in terms of a price depreciation. Similarly, if your equity portfolio is skewed in favour of themes like rate sensitives or commodities, you need to be cautious. Any downturn in these themes could largely impair the performance of your equity portfolio. This kind of granular sensitivity analysis is a part and parcel of your portfolio health check.

5.  What are the likely hidden risks in your portfolio
This is a worst case scenario that you need to constantly do to your portfolio. These are not black swan events but these are some hidden risks like some bond holdings where the companies are in financial crisis. It could also be an exposure to liquid assets where the yields are falling due to a surfeit of liquidity in the system. Your portfolio in equities could be exposed to hidden risks like too much leverage in certain companies or lack of liquidity in certain other companies. These risks may not immediately evident but you need to constant keep a tab on news flows to ensure that these problems do not aggravate.

6.  Is it time to meaningfully rebalance your portfolio?
When you do a portfolio health check, the key output is whether to rebalance your portfolio or not. A meaningful rebalancing means that there are substantive changes in your asset mix. Remember, portfolio rebalancing has a cost in terms of transaction cost, statutory cost and in terms of taxation cost. You need to evaluate the impact net of all these costs. You also need to take a call on the periodicity of rebalancing; whether it should be annually, once in 3 years on subject to stimuli.
A regular portfolio health check is must for any portfolio. Many of the black box models are really sophisticated and robust. But you need to understand what you are trying to achieve through a portfolio health check.

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