Several things have happened in the past few days and weeks that changed the investment climate significantly for the retail investor. Firstly, the US Fed has announced a tapering of its bond buying programme which could see risk-assets being impacted. Secondly, the bond market has seen its biggest turmoil in years, especially when liquid funds gave negative returns for a week, showing that there's no free lunch even in simple debt investments. Thirdly, equity markets have hit all-time highs, even in a slowing economy, thereby surprising experts.
Not surprisingly, many retail portfolios may have not moved as planned. But whether you had a good year or not, the way forward is to review what went right or wrong with your portfolio, and then rejig your portfolio to make the best of 2014.
| HOW TO GO ABOUT BALANCING |
|
The onset of tax-free bonds and soon-to-happen launch of inflation-linked bonds are other good triggers to revisit your portfolio. A tax-free yield of more than 8.5 per cent a year is mouth-watering. This is even better than the Public Provident Fund, or POMIS for that matter. These have risks attached, though they are low. The two issues of tax-free bonds currently available are of The Housing and Urban Development Corp (Hudco) and India Infrastructure Finance (IIFCL). Both have interest coupons ranging from 8.6 to 9 per cent. Although tax-free bonds are a good investment option for high returns, there is no easy way to redeem them as they are low on liquidity. Though investments such as these are tempting, one should keep the liquidity disadvantage in mind before investing in them for longer periods.
Real estate has been going through a dull phase for quite some time now. Across the country distress sales are the norm in the real estate market. Delivery delays and correction in property rates are prevalent across several micro-markets. Investors are neither seeing capital appreciation nor rental yields as delivery delays have impacted the under-construction property market. Ready properties have lower yields.
A recent study showed that many people who invested in debt markets because of its good performance in the last few years have lately not seen a positive real rate of return given the high degree of inflation in the country. Equity funds on the other hand have shown greater potential and given good returns this year.
Given so many triggers to review one's investments, how can one best utilise the present moment to stay on course amidst volatility? One proven technique is portfolio rebalancing. This involves reviewing and revising the composition of a portfolio, that is, one's asset mix. One of the approaches to rebalancing a portfolio is called the constant-mix approach. This calls for maintaining the proportions of one's investments with their target/set figures.
Let's say after working with your financial advisor you have chosen to keep 30 per cent in diversified equity funds, 40 per cent in fixed income assets, 10 per cent in gold ETFs, and 20 per cent in cash. The reasons for arriving at these figures may be several, but assume the proportions are determined according to the investment approach designed together with your financial advisor. If the markets show upward or downward movements, an investor has to periodically rebalance a portfolio to restore the target proportion (asset-mix). If one's equity investments have shown 30 per cent growth and fixed-income investments have declined 10 per cent (recent, August 2013, debt-fund scenario), an investor would sell some equity investments to purchase fixed-income assets in order to bring the overall asset-mix to target levels. Until the middle of this year gold has grown phenomenally. An investor keen on rebalancing would have sold gold and acquired other assets that have slipped below their target levels.
Rebalancing can also involve rejigging within an asset class. For example, a tax-free return of 8.9 per cent from the bonds being launched is any day better than taxable monthly returns from Post-Office Monthly-Income Schemes (at 8.5 per cent).
Though portfolio re-balancing may seem easy, in real life it requires much discipline and patience because it involves doing exactly the opposite of what most others are doing in the world of investing. A disciplined way of restoring target proportions is indeed an effective way of becoming a 'contrarian'. Rebalancing leads to capitalising opportunities and cutting your losses, as well. For example, tax-free bonds are a good opportunity for investors looking to invest and save tax on the interest they earn. Senior citizens looking for regular income during retirement may allocate a decent portion to them.
One must realise that certain costs come with rebalancing a portfolio. Every time one rebalances, one has not only to pay transaction charges but also taxes. Portfolio re-balancing should only be done when an investor feels that the market situation has altered. One can also decide on time-based rebalancing where an investor conducts the re-balancing exercise after a set interval. A financial advisor is the best person to guide you on rebalancing your portfolio as s/he would have good knowledge of market volatility, upcoming products, taxable gains and macroeconomic indicators likely to impact one's portfolio.
The author is founder, WealthBeing Advisors
