Time to rebalance your portfolio

With the new financial year starting, removing laggards will bring your portfolio back into shape

With the new financial year starting, removing laggards will bring your portfolio back to shape, writes SANJAY KUMAR SINGH

With both equities and debt doing rather well in the financial year 2017, most people wouldn’t like to disturb their portfolios in the coming year. But that wouldn’t be a wise decision.

The beginning of the financial year always a good time to review your investment portfolio. Not only do you need to assess the gains and losses you have made from your investment strategy, you also need to take a few essential steps like rebalancing the portfolio and removing the laggards. Equities: While large-cap equity mutual funds have given an average return of 25.25 per cent over the past year, small and mid-cap funds have surpassed them with a return of 33.18 per cent. Harrish Zaveri, senior vice president and fund manager, DSP BlackRock Investment Managers expects large-caps to do better in the coming year. “Valuations of large caps are now cheaper than those of mid- and small-caps. You will now see valuations catching up on the large-cap side. Also, the election results in Uttar Pradesh have brought in enhanced political stability. This will give investors, especially those from abroad, a fair amount of visibility and they will want to be invested in large caps in India.” Sectors like commodities, which were not doing well and were holding back the performance of large-cap stocks, have turned the corner. Zaveri expects banking, cement, auto and consumer durables to also drive the performance of the large-cap segment. Debt: It has been a good year for debt mutual fund investors as well, with different categories clocking returns of 7-10.4 per cent over the past one year, amid a declining interest rate scenario. Those returns may not, however, get repeated soon. “We expect interest rates to be range bound, with the 10-year bond yield likely to be in the 6.75-7 per cent range for the next three to six months,” says Sudhir Agrawal, executive vice president and fund manager (fixed Income), UTI Mutual Fund. He suggests that investors with a one-three year investment horizon should put their money in short-term income funds. Those with an investment horizon of more than three years may invest in income funds or dynamic bond funds. Gold: The yellow metal has been flat over the past one year (-0.85 per cent). By November 7, gold was up 21.46 per cent yearto-date for 2016. But with Donald Trump getting elected on November 8, political uncertainty ended in the international markets. His declaration that he would provide stimulus to the US economy through infrastructure spending came as a shot in the arm for the US equity markets. In the first week of December, the US Fed announced that it would undertake three interest rates hikes in 2017. When interest rates rise in the US, the dollar strengthens, and that is negative for gold. Since November the yellow metal has been declining. The strengthening of the rupee in recent times has meant that gold’s performance in the domestic market has been worse than in the international market. Says Ajay Kedia, managing director, Kedia Here, you need to sell from the two categories of equity funds and buy more of income funds and gold Amount at start of year (~ lakh) Chosen asset allocation (%) Gain/loss during the year (%) Amount at end of year (~ lakh) Asset allocation at end of year Amount as per ideal asset allocation (~) Amount to buy/sell (~) Commodities: “We expect gold to appreciate in the third and fourth quarter of 2017 due to festive season demand.” Investors should continue with an 810 per cent allocation to gold in their portfolio as a hedge against equity market downturn, geopolitical and economic uncertainty, etc. Large-cap funds Mid and small-cap funds Portfolio review Both equities and debt have done well. Investors should, however, not expect such blockbuster performance to be repeated every year. “They should not make the mistake of allocating more money to equities, especially Income funds Gold to mid- and small-cap funds, based on past performance,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. Rebalance: At the time of setting up your portfolio, you would have decided on a certain asset allocation. In the table, we have allocated 70 per cent to equity funds (75 per cent to large-cap and 25 per cent to mid and small-cap funds), 20 per cent to income funds and 10 per cent to gold.

With different asset classes giving different levels of returns, the asset allocation of the portfolio changes. In the example, allocation to equity funds has increased while that to income funds and gold has fallen (See the table row: Asset allocation at end of year). Hence, there is a need to sell a part of your holdings in the outperforming asset classes (both categories of equity funds) and put the money in the underperforming asset class (income funds and gold, in the example).

Advantage of rebalancing is that you sell high and buy low. It also helps to maintain the intended asset allocation and contains the risk in your portfolio. Remove the laggards: To identify laggards, look at how individual funds within your portfolio have performed vis-a-vis their peers. If a fund is underperforming, give it a year to turn around. After that, put it on your watch list and monitor its performance for another six months. If the underperformance continues, get rid of it. Risks: During the portfolio review, scrutinise your portfolio for hidden risks. Recently, NAVs of Taurus Mutual Fund’s debt funds took a hit due to the downgrade of Ballarpur Industries’ debt paper. “Ensure that the fund doesn’t have too high exposure to individual papers or to a particular sector. Also make sure that the quality of papers that your funds have invested in is sound,” says a Mumbai-based financial planner.

Finally, while carrying out the portfolio rebalancing exercise, keep costs in mind, such as tax and exit loads. “Sell only those funds where the cost impact will be minimum,” says Dhawan.