Summary of this article
Start with a clear investment objective—returns matter only in relation to the goal they are meant to achieve.
Quantify goals realistically, factoring in inflation, taxes and expenses to set meaningful return targets.
Align risk appetite with time horizon before deciding on asset and sub-asset allocation.
Rebalance to restore intended allocation, not to chase recent market or fund performance.
As 2025 comes to an end, year-end portfolio reviews become a natural focus for retail investors. However, a meaningful review goes far beyond checking which mutual funds performed well and which did not. The foundation of any effective review lies in a clearly pre-defined objective. Without this, portfolio assessment becomes purely relative and often misleading.
Understanding How Mutual Funds Are Evaluated
To understand this better, consider how mutual funds themselves are evaluated.
A large-cap equity mutual fund is reviewed against a benchmark, such as the Nifty 50 or the BSE Sensex. The fund manager’s performance is always explained in comparison to that benchmark. A similar framework must be applied while reviewing personal investment portfolios. The key question is not “How much did my portfolio return?” but “Did my portfolio achieve the objective it was designed for?”
Says Sachin Jain, managing partner, Scripbox, a wealth management firm: “Unfortunately, many retail investors invest without defining why they are investing in the first place. Even when objectives exist, they tend to shift over time. Today it is wealth creation, tomorrow it is capital protection, and the day after, beating the market. When objectives move, the entire basis of portfolio management collapses. Reviews then get limited to basic performance comparisons, which are highly subjective.”
For some investors, a 12 per cent return feels satisfactory, while for others even a 24 per cent return may feel inadequate, especially when they see assets like gold and silver delivering sharp gains in a short period.
Establish a Clear Goal
Before rebalancing a mutual fund portfolio ahead of 2026, investors must first establish a clear goal. This goal could be short-term, such as planning a vacation or buying a car, or long-term, such as children’s education, purchasing a house, retirement planning, or simply beating inflation.
“Once the objective is defined, the next step is to quantify it. For instance, if the objective is to beat inflation, an investor may assume inflation at 6 per cent and decide whether this return target needs to be achieved pre-tax or post-tax, and after expenses. Answering these questions brings clarity and structure to the portfolio,” says Jain.
Assess Risk Appetite
The third step is assessing risk appetite. Risk tolerance varies significantly across investors and should be aligned with both the goal and the investment horizon. Once risk appetite is established, investors can design a targeted asset allocation across equity, debt, and other asset classes. This is followed by sub-asset allocation. Within equity, for instance, investors need to decide how much exposure they want to large-, mid-, small-cap, value, or growth-oriented funds.
“Only after this framework is in place should investors evaluate whether their current mutual fund holdings are aligned with the intended allocation. Then, rebalancing becomes a logical exercise of realignment rather than reaction. It is important to remember that markets are unpredictable. No one could have accurately forecast which asset class or sector would outperform in a given year. Chasing the best-performing fund or asset often leads to disappointment and portfolio instability,” says Jain.
Accept Uncertainty, Diversify
The core principle of a successful year-end review is accepting uncertainty and building diversification around well-defined goals. By starting with clear objectives, understanding risk, and maintaining disciplined asset allocation, retail investors can rebalance their mutual fund portfolios confidently and position themselves for financial stability and long-term satisfaction as they move into 2026.
