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

The Economic Times - - Markets & Finance -

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.

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