Four investment oversights that can put your portfolio at risk


If you are reasonably serious about your finances, then you would be taking care of the basic hygiene factors for your financial security, such as having an investment plan that allocates your savings to different classes of assets. But despite your best efforts, your investment decisions may have some unintended consequences for your portfolio. Here are four situations in which your investment decisions can put your portfolio plan at risk if you are not careful enough, and how to deal with it.

Inherited assets

Risk: Skew in asset allocation

Getting an inheritance is always welcome. There are two things that are typical outcomes of getting an inheritance. First is the feeling that your accumulated wealth has increased. This may make you a little lax about your savings and investments, as a result of which your financial plan may take a hit. Second, an inheritance may mean you acquire assets that may skew your asset allocation in an undesirable way. Typically, inherited assets are real estate, gold and sometimes equity. You would tend to incorporate this inheritance with your existing assets without really examining the suitability of the new assets to your plans. When you do that the portfolio may suddenly become skewed towards a particular asset class, say, real estate or gold.

While an inheritance adds to your wealth, to ensure that it adds to your financial well-being as well, you need to work with the new assets to integrate them into your plan. You may need to sell and reinvest some of the inherited assets, or revisit your plan and cut back on your investments so that there is no unintended concentration, or you may require to increase investments in certain asset classes whose exposure in your portfolio has come down as a result of the inheritance.

The idea is to bring your portfolio in line with your financial plan as quickly as possible. “You cannot deal with inherited assets as you would with other investments because there is an emotional aspect to it. People may be unwilling to sell them because of emotional reasons. In such cases, you may have to allow clients time to come to terms with it. Sometimes, especially in the case of real estate, you just have to accept that it is going to be part of the assets and ensure that the rest of the portfolio is aligned to the financial needs of the investor,” said Naveen Julian Rego, a Sebi-registered investment adviser and certified financial planner.

Stock options

Risk: Equity concentration

Stock options form a portion of the compensation to employees in many organizations and people tend to consider them as part of their salary. While this is true, they also form part of the investment portfolio and their role in your overall financial picture has to be better understood.

For one, stock options are equity products and you must treat them like you would treat any other equity investment. If you overlook the instrument while evaluating the equity exposure in your portfolio, as is the case most of the times, you may make more equity investments, making your portfolio riskier than what you are comfortable with.

Two, there is the risk of concentration. While it is good to be invested in companies that you are familiar with, it also exposes you to the risks of underperformance of that company. Include the stock option when assessing your overall equity exposure and consider selling some of the stocks as they vest and use the proceeds to diversify into other equity shares.

“We go back to the basics and look at the asset allocation and if it has become equity and stock-heavy, we bring it to the client’s notice,” said Saurabh Bansali, founder, Fin@work Wealth Advisors Pvt. Ltd. “The reluctance to sell comes from familiarity and it is difficult to make the decision to sell particularly when the stock is doing well. We ask them to gradually liquidate, say 10% to 20% shaved off each year, till we get to an acceptable stock exposure and rebalance the portfolio,” he added.

Provident Fund

Risk: Being overlooked

The contribution made to the provident fund (PF) is an important component of the portfolio but it tends to get ignored.

It has the advantage of mandatorily starting early and keeping pace with increase in income. It forms a large portion of the portfolio in the initial years of employment. Since these deductions happen before the salary is paid out, it is easy to overlook this portion while making asset allocation decisions and assessing the risk and returns of the portfolio.

The PF is a fixed-income investment. Making more allocations to debt without considering PF will mean that your portfolio may be having more exposure to a lower-return asset class like debt than what is required.

When the returns from the portfolio is low, you may not be able to accumulate the corpus that you require or you may have to increase the contribution to the goal to offset the lower returns from debt investments. The way to deal with it is to simply consider all the savings and investments that have been made from the income, whether mandatory or voluntary, and then determine the actual asset allocation of the portfolio. Make changes as required so that the allocation is appropriately aligned to your goals.

Locked-in products

Risk: Illiquidity

When all your investments are in tax-saving products, then there is a good chance that the portfolio suffers from illiquidity. This is a situation that young earners, typically, face when they have limited surplus available for investment and their limits for tax benefits have not been exhausted. While there may be a blend of equity and debt in the portfolio, the lock-in period that is a feature of all products that provide tax benefits on investments implies that your access to funds will be restricted.

You may have investments but they may not be of use to you if you need funds in an emergency. Before you lock into funds, make sure that you have an adequate emergency corpus that is easily accessible and that none of the goals require funding before the lock-in period is over.

Keep an eye out for unintended consequences of the investments that you hold. One important way to do that is not to see any investment in isolation but as part of your overall financial picture. Ask what role each investment will play in getting you to your goals and how the features of the investment, beyond risk and return, will impact their effectiveness.