Nifty has
crossed 6,100 marks again and experts are looking for an all time new high in
the coming months. At this juncture many people, who made good profits, will be
very happy, and who failed to participate in the rally, will be seriously
looking to invest in the shares or in mutual fund schemes. Before investing or
staying invested, one should ask, whether this is the right time to enter or
stay invested or to wait for correction or book profit. Most of the investors
will be confused as what to do at this stage. The following are some
assessment, which one should consider before taking final call.
Current Facts of
market:
1) Nifty has
already moved up by 1350 points in last one year from the bottom of 4770 marks made
on 4th June’2012 to recent top of 6115.
2) GDP growth projected
for the current financial year is below 6%.
3) Current Account
Deficit is at all time high.
4) Fiscal
deficit is also a big concern for the government.
5) We will be
having general election mostly in the year 2013.
Let me first
clarify that neither I am trying to time the market, nor I am predicting market
movements to go up or down. I am just trying to highlight the basic principles
of financial planning, i.e. ART
A – Asset Allocation
R – Risk Appetite
T – Time horizon.
Asset Allocation plays a major role in deciding your
returns over a period of time. Your portfolio returns more depends on asset
allocation than fund performance. Asset Allocation means balancing between risk
and reward by investing in different kind of asset class such as Equity, Debt
and Liquid instruments. In simple words it means do not put your all apples in
one basket. Invest according to your risk appetite, time horizon and defined
future goals, but never forget your asset allocation on any given point of
time. Different asset class has different levels of risk and returns.
You must always invest according to time horizon
available for the investment. Longer the time duration available higher should
be the equity exposure and if the time horizon is very short than your
portfolio should be debt oriented. Asset
Allocation once decided should be followed seriously and accordingly should be
rebalanced periodically. Rebalancing is the process of restoring your portfolio
back to its original asset allocation. Rebalancing generally should be done
every year or when you get some good profits from one asset class like today.
You should also rebalance it 2 years prior to reaching your goals and shift
major part to debt portfolio. Gold investment should not be more than 10 to 15%
of your total portfolio. It is also advisable to take the professional advise
which can help you a lot.
Let us take an example:
Mr. Sachin aged 30 years has decided to invest, as per
his asset allocation, in the ratio, 70% in Equity and 30% in Debt. He has
invested Rs. 10 lacs last year on 01.06.2012. Accordingly he has invested 7
lakhs in equity and 3 lakhs in Debt.
After one year his value in Equity has gone up to 9.10
lakhs (30% growth) and 3.24 lakhs in debt (10% growth). His total investment
has risen to 12.34 lakhs giving him over all return of 23.4% on his total
portfolio. Now his investment is 74% in equity and 26% in debt. This clearly
shows that he has more exposure to equity compared to his asset allocation and
need to book profit in equity and allocate the profit to debt. He has to book
profit in equity and has to withdraw an amount of Rs. 46,000 and allocate to debt
fund. This will again bring him to his original asset allocation as per his
goal and time horizon decided by him.
You should also
keep in mind that after every 5 years, you have to change your asset allocation
and has to decrease equity exposure and increase debt allocation. In Sachin’s at
his age 35, his asset allocation will be 65% in equity and 35% in debt. This
rebalancing of portfolio will always keep Sachin in win win situation. Market
movements will less affect him, whether market goes up or down as he is rebalancing
his portfolio regularly as per asset allocation.
Before taking any investment decision you must do some
homework and check ART first. If you are confused and unable to take any
decision, just follow the basics.
1) Book Profit if you are getting extra ordinary
profit i.e. more than 25 to 30% p.a. in any asset class.
2) Rebalance your portfolio as per asset allocation.
3) Continue your current SIP’s as it is.
4) Do not put a lump sum amount in equity rather split
it into minimum 12 months SIP.
5) Never try to time the market.
6) Invest through mutual fund schemes and avoid direct
equity investment.
Asset allocation and rebalancing your portfolio regularly
is a key to success and financial freedom.
Article first appeared at moneycontrol.com on 16th May'2013.
