Know what you should do if your portfolio underperforms markets
2 min read 27 Jan 2021, 04:08 PM ISTAn investor's portfolio return can differ from that of the overall market due to asset allocation. Your returns will depend on how much you have allocated to equities and debt and other asset classes such as gold
PremiumS&P BSE Sensex hit an all-time high of 50,000 recently. Currently, it is below 48,000 level after four sessions of losses. Equity markets have recovered from the March lows with Sensex gaining 87% during this period. The 30-share index had crashed over 50% in about a month soon after covid-19 was declared a pandemic. Investors who stayed put with their equity investments during the market correction have been handsomely rewarded. In case of panic selling, returns would have been significantly lower.
“The main reason for a significant underperformance in 2020 was investors' panic selling in March and selling off investments closer to the market bottom. Or if you had liquidated in May or June, you still may have got pathetic returns. Equity was very volatile in 2020. The only way to have got good returns was to not touch the investments in the year! Sometimes doing nothing gives the best returns. The year 2020 is the best example for this," said Sriram Jayaram, a Sebi-registered investment planner.
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An investor's portfolio return can differ from that of the overall market due to asset allocation. Your returns will depend on how much you have allocated to equities and debt and other asset classes such as gold. If you are holding 50% equities, your returns are likely to be different from a person holding 80% equity in his or her portfolio. You are likely to significantly underperform the markets as well.
In case you were fully invested in equities, your return would also depend on your underlying portfolio, that is the stocks or mutual funds that you are holding. Sensex and Nifty are a representative of a basket of stocks. Sensex is a basket of 30 largest companies with weightage based on the free-float market capitalization of the companies. Nifty is a basket of 50 largest companies with weightage proportional to their free-float market capitalization. So, if your holdings are significantly different from that of Sensex and Nifty, your portfolio returns are likely to be different.
So, to replicate Sensex or Nifty performance, you can invest in Sensex or Nifty exchange traded funds (ETFs) of index funds. ETFs and Index funds try to replicate the performance of the respective indices before expenses.
So, you need to understand the reasons for underperformance in your portfolio. In case you are fully invested in equities and your portfolio is underperforming the markets significantly then you should look at the performance of the respective mutual funds or stocks you are invested in. If they are underperforming their peers over a long time, you may consult your planner on whether you should exit those funds or not. Don’t make a hasty decision.
“A person should assess the situation and find out why there is significant underperformance in his/her portfolio, he/she should check if the portfolio is in line with the needs for which he/she is investing. Is the underperformance due to being aggressive or wrong choice of instruments and take corrective actions," said Chandan Singh Padiyar, a Sebi-registered investment advisor.
Also, if your allocation to equities is low but in line with your asset allocation, you shouldn’t increase it chasing the returns. “The asset allocation is based on your risk taking capability. You should never invest a higher percentage in equity without a good understanding of the risks involved," said Jayaram.
