Reduce your portfolio risk by rebalancing
Avoid extreme steps like investing more in equities amid the bull run, or exiting completely for fear of a correction
An annual review of one’s portfolio may suffice in normal times. But you must do so twice a year in these difficult times. Pay heed to a few aspects especially. One, in the wake of the widespread disruption in incomes, check if you have been saving according to plan. You also need to evaluate if your portfolio has deviated from its long-term asset allocation owing to the massive run-up in equities. And you need to make sure your family is adequately insured against a possible third onslaught of the pandemic.
Did you save according to plan?
The inability to save regularly is a key reason why people fail to achieve their financial objectives. Says Manish P. Hingar, founder, Fintoo: “Many people are not where they should be financially because they fail to save and invest according to plan.” Begin your review by checking whether you were able to invest the targeted amount every month.
If you find yourself off target, sit with your spouse and prepare a monthly household budget. Says Rishad Manekia, founder and managing director, Kairos Capital: “Decide on an optimal savings rate based on your financial situation and your financial goals.”
The amount you save should be linked to your financial goals. For example, if you are 40 today and plan to retire at 60, it means you have 20 years to save up a corpus that will need to last for at least another 30 years.
Sync portfolio with asset allocation plan
The market has run up considerably over the past year. The Nifty is up 48 per cent; the Nifty Midcap 50, 78.4 per cent; and the Nifty Smallcap 250, 107.5 per cent. Short-duration funds, on an average, have given a return of 6.2 per cent, while gold has been stagnant (-1.65 per cent). Suppose that your original asset allocation was as follows: 60 per cent to equities, 30 per cent to debt, and 10 per cent to gold. If your portfolio has not been rebalanced over the past year, it would have grown overweight on equities.
To rebalance it and bring it back in line with your original asset allocation, you may sell some of your equity holdings. These days long-term capital gains are taxed at 10 per cent on the amount exceeding ~1 lakh. If your goal is within the next two years, sell equities even if you have to pay tax on the gains, and move your assets to fixed income. On the other hand, if your goals are, say, five years or more away, then you may rebalance by investing more in fixed income and gold.
Avoid extreme measures. Says Jharna Agarwal, head, Anand Rathi Preferred: “After the fabulous return that equities have provided over the past year, aggressive investors want to move more money into equities while conservative investors want to book profits and move out com- pletely. Both these actions should be avoided. The right thing to do is to realign and ensure your portfolio is in line with your ideal asset allocation.”
Since rebalancing can give rise to costs, like tax and exit load, Hingar warns against doing so too frequently. Adds Agarwal: “Do not get overly swayed by last two years’ returns from gold and international funds as it is difficult for any asset class to outperform continuously. Maintain a moderate allocation to both.”
Check fund performance
Look at a fund’s seven-year performance. If it is significantly below its benchmark and category average return, put it on your watchlist. Stop investing more into that fund. Watch the fund for three or four quarters. If the underperformance continues, exit it.
Do you have adequate emergency corpus?
The pandemic has underlined the need for a hefty emergency corpus. As a thumb rule, it is good to have six months of income saved up as emergency fund. Says Adhil Shetty, chief executive officer (CEO), Bankbazaar: “Based on your experience of the past one year or so, evaluate if your emergency fund is sufficient, and if it needs to be increased or reduced. Also consider ways to replenish it if you’ve had to dip into it during the past year.” Evaluate the liquidity of these funds also and ensure that your family and you can access it with ease in an emergency.
Are you sufficiently insured?
Evaluate whether your health insurance policy provides sufficient cover. If you live in a metro, you should have a sum insured of at least ~5 lakh for each member of the family. Says Shetty: “Consider buying a super top-up to enhance the sum insured and a critical illness policy to enhance your ability to deal with dreaded diseases.”
Evaluate if your life insurance needs have changed. If you have taken on more liabilities, such as a home loan, or an education loan for your child, enhance your cover. Says Hingar: “Typically insurance needs do not change at short intervals. Review your insurance coverage once in two years.”
If your goal is near, sell equities. If it is several years away, invest more in fixed income and gold to rebalance
Draw up a pre-payment plan
If your earnings remain on track or have begun to recover after the lockdowns, draw up a repayment plan for your debts, especially for big-ticket items like home loan. Says Shetty: “Even a small prepayment can go a long way towards reducing your interest burden. Also consider converting expensive debts into less expensive ones.”
Finally, check if all your assets have nomination in place. If a change or update is required, do so. If you don't have a Will, write one.