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

How to generate a UAN Online

Best SIP Funds Online   In order to make Employees' Provident Fund (EPF) accounts portable, the Employees' Provident Fund Organisation (EPFO) had launched the facility of Universal Account Number (UAN ) in 2014. Having a UAN is now mandatory if you have an EPF account and are contributing to it. So far, you got this number from your employer and every time you changed jobs, you had to furnish this number to the new employer.  However, in order to make it easier for you to get a UAN , and without your employer's intervention, the EPFO now allows you to go online and generate a UAN on your own. This facility can be used by freshers, or new employees, who are joining the workforce as well as by employees who have older EPF accounts but do not have a UAN as yet. As a new employee, you can simply generate a UAN and provide the number to your employer at the time of joining, when you need to fill up forms for your EPF contribution. As per a circula...

Reliance Regular Savings Fund - Debt Option

Reliance Regular Savings Fund - Invest Online     The scheme aims to generate optimal returns consistent with moderate levels of risk. It will invest atleast 65 per cent of its assets in debt instruments with maturity of more than 1 year and the rest in money market instruments (including cash or call money and reverse repo) and debentures with maturity of less than 1 year. The exposure in government securities will generally not exceed 50 percent of the assets. The fund uses a mix of relatively low portfolio duration with active investments in higher-yielding corporate bonds. It does not take aggressive duration calls but tries to improve returns by cherry-picking corporate bonds. This is reflected in the fund's returns matching the category and benchmark for five years - at 8.4 per cent - but lagging behind the category during a raging bull market in bonds in the last one year. The fund has been a consistent but not chart-topping performer in the income category. Despite its ...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IIFL NCDs

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India) IIFL NCDs IIF's six-year unsecured NCD 2012 Risk-wary investors should stay away from this issue, and even, risk-taking ones should think twice It is a public issue of unsecured redeemable non-convertible debentures ( NCDs ) by India Infoline Finance ( IIF ), an unlisted company, which is a 98.9 per cent subsidiary of India Infoline, a listed company. The issue seeks to raise Rs 250 crore with an option to retain over-subscription up to Rs 250 crore taking the total potential issue amount to Rs 500 crore. It will be open for public subscription from September 5 to September 18 with a minimum application size of Rs 5,000 in the form of five NCDs of face value Rs 1,000, TENURE & RATES: IIF will redeem the NCDs at the end of six years, and investors wanting out before six years will be able to sell the...

ICICI Prudential Mutual Fund unveils scheme - ICICI Prudential Multiple Yield Fund Series 2 Plan D

  ICICI Prudential Mutual Fund has launched a new fund named ICICI Prudential Multiple Yield Fund Series 2 Plan D. The new fund offer will close for subscription on December 15.       --------------------------------------------- Buy Mutual Funds Online by selecting the Mutual Fund Schemes. Invest in Mutual Funds Online Mutual Funds Online   Download Mutual Fund Applications / Forms from all AMCs: Download Mutual Fund Applications
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