Diwali is the time when many of us focus on cleaning our homes to welcome good luck and positivity. But have you ever thought of doing the same for your financial portfolio? Like a home, your portfolio can also benefit from a thorough clean-up and reorganization to ensure it’s ready for growth in the coming year. Over time, investments can start lagging, and an unbalanced portfolio can even increase financial risks. Here are ten practical tips to help you refresh your investments this Diwali and optimize them for better returns.
1. Cut Out Underperforming Investments
A good first step is to identify investments that haven’t been performing well. If certain stocks or mutual funds consistently underperform, it may be time to let them go. Holding on to such investments can reduce your overall returns, so it’s better to eliminate them and reallocate the funds to more promising options. This will not only improve returns but also reduce unnecessary risks.
2. Rebalance Your Portfolio for Stability
As markets fluctuate, the original balance in your portfolio can shift. For example, if you initially invested 60% in equities, 30% in fixed income, and 10% in gold, market growth may have shifted these ratios. Regular rebalancing helps maintain a balanced portfolio that suits your risk appetite and financial goals. If equities have grown too much, you might consider moving some funds to fixed income or gold to stabilize your portfolio.
3. Simplify Your Mutual Fund Investments
Investing in too many mutual funds can make your portfolio complicated and harder to manage. If you have several funds with similar investment strategies, consider consolidating by keeping the top performers and selling off the rest. This streamlining not only makes tracking easier but also helps you maintain a clearer view of your overall risk profile.
4. Focus on Tax-Efficient Investments
While fixed deposits and bonds are popular for fixed income, they are not the most tax-efficient options, as their returns are fully taxable. Instead, you could look at tax-friendly alternatives like debt funds or arbitrage funds, which may offer better returns after tax. Moving some fixed income investments to these tax-efficient options could be a smart move this Diwali.
5. Limit Exposure to Small and Midcap Stocks
Small and midcap stocks have high growth potential but also come with higher risks. Experts recommend that no more than 40% of your portfolio should be in these segments. Large-cap stocks, on the other hand, are generally more stable and suitable for those looking for reliable returns over time. Review your small and midcap investments to ensure they don’t dominate your portfolio.
6. Avoid Large Amounts in Fixed Deposits
Fixed deposits may feel safe, but their returns can be significantly impacted by both tax and inflation, making them less profitable. If you have a large portion of your funds in fixed deposits, consider shifting part of it to debt funds, which may offer better returns over time while remaining relatively stable.
7. Avoid Equities for Short-Term Financial Goals
Equities are known for their long-term growth potential but can be risky for short-term goals due to market volatility. If you’re planning to reach a financial goal within the next 1-2 years, debt funds or other fixed income options may be safer choices. This way, you can avoid unexpected losses and have better predictability in achieving your short-term goals.
8. Evaluate High-Risk Funds in Your Portfolio
If you’re invested in aggressive or high-risk mutual funds, it’s essential to keep your portfolio diversified. While high-risk funds can offer higher returns, too much of them can increase potential losses. Check the performance and distribution of these funds and balance them with more stable investments to manage overall risk.
9. Exit Investments with Consistently Low Returns
Some investments in your portfolio may not be giving good returns consistently. Instead of holding on to these, it’s wise to switch to options with better performance. This will free up your capital for new investments that align with your financial goals and have higher growth potential.
10. Explore New Investment Opportunities
Cleaning up your portfolio isn’t just about removing old investments; it’s also a chance to explore new opportunities. This Diwali, consider diversifying into other profitable segments like gold, real estate, or even newer options like REITs (Real Estate Investment Trusts) and digital assets, depending on your comfort level with these markets. However, always do your research before venturing into any new investment area.
