Take the SIP Route to Boost Equity Portion in Your Portfolio
Experts advise individuals to avoid knee-jerk reactions while rebalancing their portfolios and consider all implications before liquidating debt instruments, says Preeti Kulkarni
Over the week, everyone — investors, market pundits, economists, industry experts, and so on — are convinced that the new government will put the economy back on track and it is a great time to be an investor in the Indian stock market. Many individual investors are thrilled to hear this news. But, they are also a little nervous due to the hurried changes that they had made to their original investment plan in the last few years. Faced with bleak economic indicators and a comatose government, investors chose to reduce their exposure to equity drastically and invest heavily in debt instruments that were offering attractive returns.
These investors know that altering a heavily-skewed portfolio towards debt cannot be done overnight, as one has to evaluate every investment and look at the exit options and taxation before liquidating it. “The restructuring exercise should be carried out over a period of six months to one year. Before liquidating instruments like fixed deposits (FDs) and debt mutual funds, you need to ascertain the tax implications, premature withdrawal penalties and exit loads. Calculate the post-tax return before taking any call to liquidate these investments, as that is the effective rate of return you will earn,” says certified financial planner Suresh Sadagopan, founder, Ladder7 Financial Advisories. Take a look at the sample portfolio of an investor, whose original plan was to invest 40% in stocks, 55% in debt, and the rest in gold. However, she was spooked by the gloomy stock market forecasts and reduced her equity exposure to 10%. She redirected most of her investments to instruments like FDs, liquid funds, fixed maturity plans (FMPs) and tax-free bonds. Now, she has regained her confidence and is ready to take the plunge into the stock market. But she is plagued by so many questions — should she, in light of the drastically altered scenario, look to immediately switch back to her original plan? Or should the restructuring be done in a staggered manner? Sadagopan says reducing equity exposure drastically is a panic reaction, which retail investors are prone to and something that investors need to guard against. “If investors cut their exposure from 40% to 10% in equity, they are not following good asset allocation principles. These are, however, your typical retail investors, who behave in this irrational manner and keep complaining that they do not make money in equities,” he says. Such knee-jerk reactions can harm your financial health. “In the last six years, we had always suggested tactical reallocation, away from the strategic asset allocation. For instance, instead of 55% exposure to equities as suggested, they could go as low as 45% in adverse market conditions. In those cases, they can slowly get back to the desired asset allocation over time through SIPs (systematic investment plan) or other means,” he says.
Getting Back on Track
An investor can start the process of rebalancing the portfolio by liquidating FDs, except the one meant for any contingencies. “The amount can be used to hike the equity portion through the SIP or systematic transfer plan (STP) route,” says certified financial planner Harshvardhan Roongta, CEO, Roongta Securities. Similarly, he recommends transferring money lying in liquid funds regularly towards equities. As for FMPs and tax-free bonds, it would make sense to hold on to them till maturity. “I would recommend holding on to tax-free bonds as they are a good debt investment. Besides, if and when interest rates fall capital gains can be made,” he says. Investors may also be forced to hold on to their FMPs as they are highly illiquid.