Time to rebalance your portfolio

Nifty has again touched 8,900 mark and it’s near to all time high of 9,100 mark and experts are looking for new high in coming months. This year’s budget was good as far as stock market is concerned. The fiscal deficit target kept at 3.2% for next financial year which is a positive move to reduce the deficit. The big relief for market came from no change in equity long term gain period, which gave a positive momentum to the market. But we should also not forget that the market is near at all time high and also market trailing PE is around 24 which is considered high for equity investment. As a good investment strategy it is also important to review and rebalance the portfolio periodically.

Most of the investors will be confused as what to do at this stage. Before investing fresh you should ask, whether this is the right time to enter or wait for correction. The present equity investors will be also I dilemma whether to book profit or stop future SIPs. The following are some assessment, which you should consider before taking a final call. Let me first clarify that neither I am trying to time the market, nor I am predicting market movements to go down or up. I am just trying to highlight the basic principles of investment planning.

Current Facts of market:

Market discounts the future events and the same is reflected in the current market prices. The trailing is PE is near 24 which tell us that market is not cheap now. All the positives are already factored in the market. RBI also has kept the repo rate unchanged and stance from accommodative to neutral in last review policy. The market is looking out for the outcome of UP election and how the GST plays out in coming months. Internally things are settled and mostly are in favour of our economy but there are international events can spoil the party particularly the US budget and its policies for outsiders. US Federal bank also likely to increase interest rate in near future.

Therefore, 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, Gold and Real Estate. In simple words it means do not over board on single asset class. 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 in a different market cycles.

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 or there are huge losses from one asset class. You should also rebalance it 2 to 3 years prior to reaching your goals and shift major part to debt portfolio. Gold investment should not be more than 10 % of your total portfolio. It is also advisable to take the professional advice which can help you a lot. 

Let us understand with an example:

Mr. Manoj 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 3 years back. Accordingly he has invested 7 lakhs in equity and 3 lakhs in Debt.

After three years his value in Equity has gone up to 11.50 lakhs (CAGR of 18% p.a. ) and 3.80 lakhs in debt (CAGR of 8% p.a.). His total investment has risen to 15.30 lakhs giving him over all return of 15.25% on his total portfolio. Now his investment in equity is 75% and 25% in debt. This clearly shows that he has more exposure to equity compared to his asset allocation and need to book profit and has to withdraw an amount of Rs. 80,000 from equity 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. This rebalancing of portfolio will always keep Manoj in win win situation.

Before taking any investment decision you must do some homework. If you are confused and unable to take any decision, just follow the basics. Asset allocation and rebalancing your portfolio regularly is a key to success and financial freedom. Take a professional help which can really add value.

This article first published at indianotes.com on 22nd Feb 2017

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