Investment Blog

How to do sanity check of your investment portfolio?

What could be wrong in a portfolio managed by well-known wealth management companies?

I met a client last month. Two top wealth management companies managed his portfolio. He was happy with the returns. He showed me the portfolio. And here it all came crashing.

Below is what was wrong with the portfolio and the possible reasons:

1. Asset Allocation: 75% in equity and 25% in Debt. No allocation to Gold. An advisor who understands macroeconomics would have allocated Gold long back to the portfolio. Another reason for no Gold allocation is tied to incentives. Most advisors who work on commission-based models try to make portfolio equity-heavy, as it pays higher commissions than debt. Gold funds offer very low commissions. That’s how incentives interfere with a suitable asset allocation.

2. Portfolio Concentration: 37 mutual funds and 14 PMS/AIFs with allocation of less than 1% to 15% across different commission-based regular plan schemes. This level of diversification can result in capital being spread too thinly across investments, leading to a marginal impact from the high performance of any single asset or fund. This often contributes to average or below-average overall portfolio performance. It could be because of the absence of a portfolio construction plan.

3. PMS/AIF Exposure: Approximately 62% of the portfolio was invested in high-cost PMS/AIFs. We analysed that these PMS and AIFs underperformed their mutual fund counterparts due to their complex structures, high fees (management and performance fees), and less favourable taxation. These structures should be introduced very carefully after a particular portfolio size. By the way, such products also pay higher commissions than mutual funds.

4. Market Cap Exposure: Higher exposure in Mid and Small Cap – 27% and 19% respectively. When schemes are selected based on past performance alone, you end up holding expensive portfolios with significant downside risks. An advisor should be able to prepare a future-ready portfolio.

5. Performance: The overall mutual fund family portfolio had given 0% over the last 1 year, vs Truemind’s aggressive portfolio performance of 14% with only 50% allocation to equity. The underperformance is even more prominent when considering the large underperformance of PMS/AIF.

6. No asset allocation plan: Without an asset allocation framework and clear investment philosophy, you are left at the mercy of emotional decision-making that leads to big mistakes.

Despite shelling out commissions of approximately INR 25 Lakhs per annum, the value addition to the portfolio was sub-standard.

If you notice such things in your portfolio, it’s time for a course correction before it’s too late.