How about Some Diwali Cleaning? But, for Your Investment Portfolio

Diwali is right around the corner. And how do most of us prepare for it? By cleaning our homes, of course. It’s one of the many things we do just before the festive season begins.

It is not uncommon to receive promotional messages from cleaning services providers during this time of the year as well. Diwali cleaning is a big deal in most parts of the country.

The significance of Diwali cleaning stems from the belief that Lakshmi, the Goddess of Prosperity, enters only clean homes. This festive cleaning also signifies letting go of the old and making room for the new in our homes and lives.

While we’ll clean our homes this Diwali, wouldn’t it make sense to do the same to our investment portfolios as well? Quite a lot of investors are hoarders when it comes to their investments.

Letting go of stocks and mutual funds is difficult for many. Even when their investments are underperforming, investors tend to be unreasonably hopeful and shy away from getting rid of them. But, of course, selling underperforming stocks and mutual funds is as important as giving away that old pair of de that you don’t wear anymore.

So, if you’re ready to give your investment portfolio a thorough Diwali cleaning, here are a few tips and ideas that you would find useful.

1. Be hopeful, but not overly hopeful

It’s very good if you invest in equities with a long-term view, but that doesn’t mean that you should continue holding onto an underperforming investment for eternity. If a stock or fund that you’ve invested in keeps doing poorly, then it’s better to book losses and sell it before it keeps getting worse.

A 10% loss is better than incurring a 30% or more loss in the hope that the investment might someday turnaround. So, this Diwali, sell the underperformers and reinvest the money in investments that are doing better.

2. Check if your asset allocation is in place

If you invest with specific goals and objectives in mind, and you should, then you would have your investment portfolio allocated to different asset classes. Equity is great for long-term investment strategy, but a short-term goal might call for investments in debt.

It’s a good idea to spread your investments across assets in general as well, since every asset type has its own pluses. Equities can help you build wealth while debt can help you protect wealth.

So, review your portfolio this Diwali and check if your portfolio is as balanced as you’d want it to be.

3. Book profits in some cases

When you check how your investments are performing, you might come across some cases where the investment is doing exceptionally well. This would particularly be the case with long-term investments. Since the markets have been volatile, such cases would probably be rare, which makes it even more appealing to book profits.

You can even use some of the profits to gift something to your family members or take them out on a vacation.

It’s Diwali, after all.

These are some of the ideas that you can use to get some portfolio rebalancing and cleaning done.

But when you are selling investments, be mindful of the income tax implications on your profits. Long-term capital gains from equities and equity mutual funds of over Rs 1 lakh in a year are subject to 10% tax.

If you have held the investment for less than a year, then there might be short-term tax implications. Consider both before you sell.

Happy Diwali!