 "Rebalance your equity portfolio, handle debt with care")
There are many investors who put the entire Rs 1 lakh limit of the Public Provident Fund (PPF) in April itself because it helps them earn the entire interest income of 8.7 per cent a year. Many financial planners received calls on the Union Budget day from clients wondering if they should immediately put the additional Rs 50,000 limit that Finance Minister Arun Jaitley had given them for 2014-15.
"Some even lamented the loss of interest income of an entire quarter," says a financial planner.
With the Budget passed, many financial planners are busy reworking their clients' portfolios. "There has to be some tinkering due to the additional limits. Plus, the debt fund investments have to be changed to make these more tax-efficient," says financial planner Suresh Sadagopan.
Portfolio rebalancing is important. Not only because of the Budget but due to the good returns from both the equities and debt part of the portfolio. Suppose you had a portfolio with 40 per cent in debt and 60 per cent in equities last year. Today, this portfolio would be heavily loaded in favour of equities.
A Rs 10 lakh portfolio with a 40:60 debt equity ratio would have had Rs 4 lakh in debt and Rs 6 lakh in equities last year. Now, considering the returns of the equities benchmark, the BSE exchange's Sensitive Index or Sensex, the equities portfolio would have swelled to around Rs 8 lakh (31.9 per cent). Taking the one-year, nine per cent fixed deposit as a benchmark for debt returns, those returns would be Rs 4.36 lakh. In sum, the portfolio would be worth Rs 12.36 lakh, up 23 per cent.
If you want to follow the same debt to equity ratio, it has changed to 34 per cent in debt and 66 per cent in equities. So, to bring it back to the same ratio, Rs 74,160 needs to be invested in debt. This will take the debt portfolio to Rs 5.01 lakh. Bring down equities to Rs 7.25 lakh and the 40:60 ratio will be maintained.
This is an oversimplified case, as the returns would differ according to the instruments. If someone had invested in a top performing mid-and small-cap fund, the portfolio returns would have rocketed to 116 per cent annually. And, in the worst case, investing aggressively in gold funds would have led to a decline in the portfolio's value by three per cent. Obviously, financial planners like Sadagopan are recommending only five to10 per cent in gold as a hedge.
But rebalancing between asset classes is not enough. "It is just the first step. There is to be rebalancing within the asset class as well," says Hemant Rustagi, chief executive, WiseInvest Advisors.
The rebalancing in equities can be crucial. For example, the past one year's exceptional performance would give an opportunity to many investors to exit non-performing stocks and mutual funds. For instance, laggards in the past like the infrastructure and real estate sectors are again finding favour. Infrastructure funds are up 65 per cent - among the top performers - in the past year. Similarly, the BSE mid-cap and small-cap indices are up 88 per cent and 65 per cent, respectively. The current outperformance has helped these sectors' returns even over a three-year and five-year period. That is, returns from infra funds are in the green at five per cent annually over a five-year period.
Debt, on the other hand, has to be handled with more care because of the taxation in the Union Budget. "Suddenly, the tenure of debt investments has become very important. Earlier, the majority of investors used to simply put in fixed maturity plans or other instruments and once these matured, they would worry about the next investment, as per the flavour of the season," adds Rustagi.
Now, things have to be thought out differently. "Yes, arbitrage funds look good because they are like debt but due to the underlying investment in equities, they get tax benefits like equities. But with returns of nine to 10 per cent, they are only good for one year or so," says a fund manager.
The important thing will be look at debt instruments in line with the requirement or preferably through the prism of financial goals. There is no point in investing in a one-year or two-year fund if you do not need the money then.
If you need it for liquidity, go for short-term funds, of less than one year. Similarly, for longer term needs, go for schemes that are over three years, to benefit from some tax relaxation. Since the inflation indexation benefit is still there after three years, the tax liability will be lower vis-a-vis fixed deposits. This will be useful especially if you are close to retirement, as instruments like asset allocation schemes or monthly income plans will give benefits after three to five-year plans.
35-45 years:
EQUITY STRATEGY: Have 60-75% mainly through mutual fund schemes. Of the overall allocation, 65% in large caps, index, balanced & dividend yield funds. 20-25% can be in mid- and small-cap funds. Balance can be in sectoral, thematic & international funds
DEBT STRATEGY: Invest 35-45%. PPF should be taken advantage of fully. Liquid / Ultra ST funds can be used. Rest in medium-term/long-term debt funds/FMPs/tax-free bonds
GOLD STRATEGY: 5-10 per cent (as hedge)
45-55 years:
EQUITY STRATEGY: Have 45-60%. Of this, 70% or more towards large-caps, about 20% to mid-and small-cap funds and the rest towards international, thematic, sectoral funds etc
DEBT STRATEGY: Invest about 50-60% in debt instruments. In this phase tax considerations dominate. PPFs continue to be an investment destination of choice. Fixed deposits/non-convertible debentures/ bonds can also be used for diversification. Tax-free bonds can be bought from secondary markets, if there are no fresh issues. Medium to long-term debt funds & FMPs will be good for the portfolio too
GOLD STRATEGY: 5-10 per cent (as hedge)
"Some even lamented the loss of interest income of an entire quarter," says a financial planner.
With the Budget passed, many financial planners are busy reworking their clients' portfolios. "There has to be some tinkering due to the additional limits. Plus, the debt fund investments have to be changed to make these more tax-efficient," says financial planner Suresh Sadagopan.
Portfolio rebalancing is important. Not only because of the Budget but due to the good returns from both the equities and debt part of the portfolio. Suppose you had a portfolio with 40 per cent in debt and 60 per cent in equities last year. Today, this portfolio would be heavily loaded in favour of equities.
A Rs 10 lakh portfolio with a 40:60 debt equity ratio would have had Rs 4 lakh in debt and Rs 6 lakh in equities last year. Now, considering the returns of the equities benchmark, the BSE exchange's Sensitive Index or Sensex, the equities portfolio would have swelled to around Rs 8 lakh (31.9 per cent). Taking the one-year, nine per cent fixed deposit as a benchmark for debt returns, those returns would be Rs 4.36 lakh. In sum, the portfolio would be worth Rs 12.36 lakh, up 23 per cent.
If you want to follow the same debt to equity ratio, it has changed to 34 per cent in debt and 66 per cent in equities. So, to bring it back to the same ratio, Rs 74,160 needs to be invested in debt. This will take the debt portfolio to Rs 5.01 lakh. Bring down equities to Rs 7.25 lakh and the 40:60 ratio will be maintained.
This is an oversimplified case, as the returns would differ according to the instruments. If someone had invested in a top performing mid-and small-cap fund, the portfolio returns would have rocketed to 116 per cent annually. And, in the worst case, investing aggressively in gold funds would have led to a decline in the portfolio's value by three per cent. Obviously, financial planners like Sadagopan are recommending only five to10 per cent in gold as a hedge.
But rebalancing between asset classes is not enough. "It is just the first step. There is to be rebalancing within the asset class as well," says Hemant Rustagi, chief executive, WiseInvest Advisors.
The rebalancing in equities can be crucial. For example, the past one year's exceptional performance would give an opportunity to many investors to exit non-performing stocks and mutual funds. For instance, laggards in the past like the infrastructure and real estate sectors are again finding favour. Infrastructure funds are up 65 per cent - among the top performers - in the past year. Similarly, the BSE mid-cap and small-cap indices are up 88 per cent and 65 per cent, respectively. The current outperformance has helped these sectors' returns even over a three-year and five-year period. That is, returns from infra funds are in the green at five per cent annually over a five-year period.
Debt, on the other hand, has to be handled with more care because of the taxation in the Union Budget. "Suddenly, the tenure of debt investments has become very important. Earlier, the majority of investors used to simply put in fixed maturity plans or other instruments and once these matured, they would worry about the next investment, as per the flavour of the season," adds Rustagi.
Now, things have to be thought out differently. "Yes, arbitrage funds look good because they are like debt but due to the underlying investment in equities, they get tax benefits like equities. But with returns of nine to 10 per cent, they are only good for one year or so," says a fund manager.
The important thing will be look at debt instruments in line with the requirement or preferably through the prism of financial goals. There is no point in investing in a one-year or two-year fund if you do not need the money then.
If you need it for liquidity, go for short-term funds, of less than one year. Similarly, for longer term needs, go for schemes that are over three years, to benefit from some tax relaxation. Since the inflation indexation benefit is still there after three years, the tax liability will be lower vis-a-vis fixed deposits. This will be useful especially if you are close to retirement, as instruments like asset allocation schemes or monthly income plans will give benefits after three to five-year plans.
| HOW TO INCREASE YOUR RETURNS Investment strategies for various age groups |
| 25-35 years: EQUITY STRATEGY: Have 65-75% mainly through mutual fund schemes. Of the overall allocation, 60% in large-cap, index, dividend yield & balanced funds. About 25-30% can be in mid- and small-cap funds. Rest in international funds, thematic funds DEBT STRATEGY: Invest 30-35%. Use up the entire Rs 1.5 lakh in PPF, preferably in each account, if married. Consider using liquid funds for liquidity. Debt funds compete well with fixed deposits and can invest in these even in 1-3 year periods. Beyond three years, invest in medium/ long term debt funds & FMPs for getting better post-tax returns GOLD STRATEGY: 5-10 per cent (as hedge) Source: Ladder7 Financial Advisories |
EQUITY STRATEGY: Have 60-75% mainly through mutual fund schemes. Of the overall allocation, 65% in large caps, index, balanced & dividend yield funds. 20-25% can be in mid- and small-cap funds. Balance can be in sectoral, thematic & international funds
DEBT STRATEGY: Invest 35-45%. PPF should be taken advantage of fully. Liquid / Ultra ST funds can be used. Rest in medium-term/long-term debt funds/FMPs/tax-free bonds
GOLD STRATEGY: 5-10 per cent (as hedge)
45-55 years:
EQUITY STRATEGY: Have 45-60%. Of this, 70% or more towards large-caps, about 20% to mid-and small-cap funds and the rest towards international, thematic, sectoral funds etc
DEBT STRATEGY: Invest about 50-60% in debt instruments. In this phase tax considerations dominate. PPFs continue to be an investment destination of choice. Fixed deposits/non-convertible debentures/ bonds can also be used for diversification. Tax-free bonds can be bought from secondary markets, if there are no fresh issues. Medium to long-term debt funds & FMPs will be good for the portfolio too
GOLD STRATEGY: 5-10 per cent (as hedge)
Note: This is a representative illustration. Financial planning for easch individual/family will be change according to individual's risk appetite, profile, dependants, tenure left for retirement and so on