Skip to main content

Asset Allocation Plan should not be disturbed despite high interest Rates


   The stock market has been volatile for a while now. At the same time, the interest rates have been moving up, making debt instruments more attractive. The recent Reserve Bank of India(RBI)policy review also under scores that the interest rates are likely to remain high for a while. So, is it time to rejig your portfolio and make fresh allocations to debt as many investors are tempted to do?
You should not deviate from your target asset allocation. Move money from equity to debt only if you have decided to rejig your asset allocation on a strategic basis and not merely as a tactical measure.


If the equity markets are weak, reflecting lower valuations, the proportion of debt in your portfolio would have proportionately increased. Therefore, a further increase in debt allocation may not always be optimal. However, one could tactically look at a modest increase in debt allocation to capture the current high rates. One should also evaluate the quality, duration and yield of one's existing debt portfolio to see if the current rates provide an additional opportunity to lock in investments in instruments offering higher yields.


Simply put, you don't change your asset allocation plan due to changes in the stock market or in the interest rate regime. In fact, the fall in market already presents you an opportunity to increase your allocation into (no, you guessed it wrong – it is not debt) equity. This is because the recent fall in stock prices may have skewed your asset allocation towards debt.


Now, you should add to the equity component to rebalance the portfolio. According to experts, such rebalancing can be done once a year or every time there is a material change either in your life's circumstances or your financial goals.


As for your existing debt portfolio, you can consider parking a portion of your corpus in fixed maturity plans (FMPs) since they are offering good rates now. But, while doing so, ensure that you do not go overboard and lock the funds meant to meet your short term liquidity requirements. In other words, maintain a balance between your hunger for yield and liquidity.


If there is a strong desire on the part of clients to migrate to a certain asset class merely because it is making the headlines owing to its strong outperformance, I usually try to dissuade them saying they should actually increase their allocation in the underperforming asset class so as to redress the balance rather than aggravate it. Sometimes, I suggest a compromise solution by utilising around 5% of the client's corpus for such tactical shifts. This is usually not large enough to cause any material impact and it assuages the client, too.

DEBT TO EQUITY RATIO

In fact, investors should better pay attention to their overall asset allocation rather than fret about the debt to equity ratio of their portfolio. This is because there is no "ideal" ratio for all investors. It is a combination of several factors like your investment objective, your risk-taking ability, your financial advisors' take on the asset class and so on.


There is a thumb rule that states that the percentage of equity allocation should be 100 minus your age, but I often quote the John Bogle version of it which states '80 - your age'.

FACTORS THAT DETERMINE THE CHANGE

Ideally, an investor should consider rebalancing a portfolio only once a year. This period is neither too frequent nor infrequent.


Investment objectives and time horizon should be the primary determinant for any change in the portfolio, though it is a good idea to review and rebalance during any significant market event that may cause volatility.


You may, however, require an interim review under two circumstances. One, there is an adverse event – it could be either internal, such as a family issue, or external like, say, a dramatic change in the investment climate. For example, the implementation of the impending direct taxes code or the 'small savings' committee report may force you to alter your investment plan.


The second scenario that would warrant a change in your asset allocation is if there is a sudden change in the timing of a financial goal.


For example, a couple living in a rented house has decided to purchase a house within a year instead of the earlier target of three years.


Typically, profits could be booked based on relative performance of an investment. That is, if there is a better investment opportunity than the one being reviewed, or when an objective has been achieved, or when a portfolio needs to be rebalanced in favour of another asset class. One must be cautious against booking profits too often, since there may be unnecessary transaction costs or taxation consideration with every transaction.
 

 

Popular posts from this blog

NRIs and direct taxes code (DTC)

DTC Proposes To Do Away With Special Provision That Allows NRIs Liberalised Duration Of Stay In Country      THE new direct taxes code could bring a large number of global Indians under the tax net, as it does away with a provision that allowed individuals to escape tax in any country citing double tax avoidance.    The new legislation, introduced in Parliament on Monday, says an individual shall be a resident of India in any financial year if he is in the country for more than 59 days in that year, and has been has been India for more 365 days in four preceding financial years. A number of Indian industrialists including Vedanta's Anil Agarwal and Essar's Ravi Ruia have acquired non-resident status over the years.    The DTC has only attempted to clean up the provision in line with the laws globally. A phrase "being outside India" in the existing income tax law exempted individuals who stay outside the country for six months from paying taxes. This was prone ...

Stick to Good Fund Manager who Can Multiply Your Investment

A manager may be the difference between the best and worst funds. Here's how you can find the right one    Does a mutual fund manager make a difference to your investment? The answer may not be as easy as you think, since most best-performing mutual funds have moved away from individualistic fund management to process-driven methods, limiting the scope of an individual's role in investment decisions. In fact, many fund managers would speak at length about how the "system" their fund house has in place makes their task of picking stocks easy even though it restricts their freedom. Still, the question is important, especially after recent reports that the Securities and Exchange Board of India ( Sebi ) may ask fund managers to disclose to investors their track record of managing money. Let us take a look at the universe of large-cap funds over the past five years. According to Value Research, an independent mutual fund tracking firm, the topper in the category is DSP...

Tata Fixed Income Portfolio Fund dividend

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)       Tata Mutual Fund has announced dividend under the dividend option of Tata Fixed Income Portfolio Scheme B2 Plan A-DQ, Tata Fixed Income Portfolio Scheme B2 Reg-DQ and Tata Fixed Income Portfolio Scheme B2 Direct-DQ. The record date has been fixed as August 29, 2013. Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C. Invest Tax Saving Mutual Funds Onlin...

IDFC Classic Equity Fund

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   IDFC Classic Equity Fund IDFC Classic Equity is a large-cap equity fund which currently has assets under management worth Rs. 158.52 crore. It was launched in August 2005. The fund is benchmarked against the BSE-200 Index. Performance YTD 1-Year 3-Year 5-Year Since Inception IDFC Classic Equity 0.93 26.61 6.30 1.01 11.65 BSE 200 1.52 17.31 6.00 1.99 12.98 All figures in % as on January 31, 2013; Returns above one-year in CAGR terms ...

Mutual Fund Review: HDFC Mid-Cap Opportunities Fund

LAUNCHED in June 2007, HDFC Mid-Cap Opportunities Fund was started as a three year closed-ended scheme. It was subsequently converted into an open-ended scheme in June 2010. The fund has been ranked as Crisil Fund Rank 1 in the small & midcap equity category according to Crisil Mutual Fund Ranking methodology over two of the last four quarters and has been present in the top 30 percentile in the category for all the four quarters. Crisil Mutual Fund Rank 1 funds form the top 10 percentile of the ranked universe representing very good performance vis-à-vis category peers. The fund, managed by Chirag Setalvad, has assets under management of ` 1,275 crore as of April 30, 2011 and has outperformed its peers and the benchmark (CNX Midcap Index) in the 1, 2 and 3 year time frames. INVESTMENT APPROACH The fund's objective is to earn capital appreciation by investing in equities of small and mid cap companies. While these companies have a higher return potential than large cap ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now