Why your portfolio may be underperforming?
Every time the Indian markets, a specific stock, or a sector reaches a new milestone, a new notification from the media appears on our mobile phones. We hear so much about the increasing economic developments as well as the innovations through numerous startups taking place all over the country. These achievements make us believe that we have a higher scope to earn returns. But when we look into our portfolio returns, they make us realize that there is something that is pulling our portfolio down. Often the portfolio returns would be below the high expectations we may have set for ourselves. There could be various reasons behind it. Let us try to understand these reasons one by one:
1. Inappropriate Asset Allocation: Your asset allocation plays an important role in the overall performance of the portfolio. It can be impacted by both underexposure and overexposure to a single security or asset type. The asset allocation of your portfolio with time will have the greatest impact on the portfolio performance as different asset classes have different risk and return trade-off. It would be challenging to achieve higher returns with the lower allocation to growth assets. Moreover, the portfolio’s asset allocation should be closely monitored as many opportunities can be missed over the investment period.
2. Wrong selection of products: It is important to match the product features with their suitability for you to get the best results. However, if you try to forcefully fit a product in your portfolio, just because you like it, the result is most likely to go unfavourable. Say, for example, you have invested majorly in guaranteed plans and the timeframe for that particular investment is around 15-20 years, it is possible that you may earn lower inflation adjusted returns in the long run.
3. Frequent buy/sell transactions: Any asset class needs a certain time to perform. In a rush to attain quick momentum profits, you may try to transact buy/sell positions frequently. You will most likely cut your winning bets too early. Frequent transactions could not only lead to high risk & costs but could also result in increased tax liability. Ideally, an asset class or product should be given sufficient time to perform in accordance with its suitable investment horizon.
4. Concentrated Portfolio: It is a common saying that one should not put all eggs in one basket as it could increase the risk of your portfolio. This is advised to avoid concentrated risk in a portfolio. If you have a higher allocation to a certain sector or security, your portfolio is more likely to go down in an event of a market correction, moreover, you are also exposed to liquidity risk. Hence, ideal diversification helps to reduce the concentration risk in the portfolio. Having said this, too much diversification also means that you are exposing your portfolio to sub-performing and riskier assets/investments.
5. Missing reviews: Your portfolio and investment plans need a periodic review. With time, your financial situations, family composition, lifestyle and needs /desires change. There might also be extreme market movements throwing up opportunities to invest or book profits. Not reviewing your portfolio on a periodic frequency or need /event-based, can put your portfolio on a lower-performing trajectory. Without reviews, you would be also losing sight of your targeted asset allocation and miss the benefits of actively managing your asset allocation.
6. Timing- a myth: It is a tendency of an investor to time the market. Quite often most investors keep waiting for market corrections before investing and in the process, lose precious time in the market and returns that they could have enjoyed. Although market valuations do have an impact, but timing the market is very difficult. Our focus should be on the period of the investment, rather than timing the market. Many studies have also shown that timing markets as a strategy have a very negligible impact on portfolio performance over the long term.
7. Unreasonable expectations: Most first-time investors enter the markets in the middle of a bull run or when that bull run is coming to an end after knowing of the huge returns that people have made in a short period of time. People expect that markets will continue to perform in a straight line and deliver handsome returns on their investments without really understanding how markets and equity investments function. Thus, you may feel that your portfolio is underperforming when you have set unreasonable return expectations in a short period of time.
Conclusion
Ensuring that your portfolio asset allocation is optimum and in tune with your risk profile and expectations, both are the first step of any investment journey. Next, one should regularly keep reviewing the same and make the necessary changes. Having the right expectations and financial behaviour may also impact your satisfaction levels. Not all of us may have the necessary time, knowledge or ability to do all this consistently over time. This is where an expert or a mutual fund distributor can play a very important role in making sure that you and your portfolio are aligned to each other and more importantly, your portfolio behaves in line with your expectations over time.