Restore global allocation if portfolio review shows fall

Lock into attractive yields offered by three-to-five-year target maturity funds

Investors will sit down in December with their financial advisers to review their mutual fund portfolios. Do-it-yourself (DIY) investors must also conduct this exercise at least once every year.

Volatile year for equities

Investors who entered the equity markets in the bull run of 2020-21 encountered volatility for the first time in 2021-2022. “Such investors would have received a reality check--that volatility is an intrinsic feature of this asset class,” says Ankur Kapur, managing partner, Plutus Capital, a Sebi-registered investment advisory firm. Equity funds, however, are likely to end the year marginally in the positive territory. Large-cap funds (category average return

7.34 per cent year-todate, YTD) have outperformed mid-cap (4.68 per cent) and smallcap funds (3.46 per cent).

The year also witnessed sector rotation with last year’s winners, like information technology, being among the worst performers this year (-18.38 per cent). Past returns of debt funds remain poor. But with yields moving up, this asset class offers opportunities.

Gold, with a YTD return of 10.6 per cent, has once again underlined its importance as a portfolio diversifier.

Risk profile

A change in the investor’s risk profile or investment horizon would necessitate a change in the strategic (long-term and ideal) asset allocation of his portfolio. An investor who, say, reached age 55 should consider tapering exposure to equities in her retirement portfolio.

“If a goal (like a child's college education) is barely three years away, reduce allocation to equities and move to safe liquid funds,” says Kapur.

Rebalance if required

Next, check if your portfolio has deviated from its original asset allocation due to market movements. “If so, book profit in the outperforming asset class and add to the underperforming asset class,” says Kaustubh Belapurkar, director-manager research, Morningstar Investment Adviser.

With most asset classes giving single-digit returns, major rebalancing may not be required in many portfolios. “If you’re within plus or minus 5 percentage points of your ideal asset allocation, no action is required,” says Arun Kumar, head of research, Fundsindia.com.

Besides asset allocation, check your sub-asset allocation by market cap (large, midand small-cap funds) and by style (growth and value).

Some experts follow a slightly different method of portfolio construction.

“We suggest to our clients that within equities, they allocate 20 per cent each to the following styles: quality, value (and contrarian), growth at reasonable price (GARP), mid- and small-cap, and global. Barring mid- and small-cap, and global (where we suggest large-cap, passive funds), we advise investors to invest in flexi-style funds, which have no market cap-related restrictions, in each of these categories,” says Kumar.

Even in the case of sub-asset allocation, follow the same strategy of selling the outperformers and adding to underperformers. “By doing this, you will systematise the practice of selling high and buying low,” says Kumar.

International allocation

A large number of investors had entered international funds in the past few years, primarily Usfocused funds, after witnessing their prolonged outperformance over the past decade. International funds are among the worst underperformers in 2022.

“Your allocation to international funds would have come down from its original level of 15 or 20 per cent of the equity portfolio. Invest more in these funds and restore your original allocation to them to keep enjoying the benefit of geographical diversification,” says Belapurkar.

Lock in yields via TMFS

Past returns of most debt fund categories are still in the low single digit. “But portfolio yields have moved to attractive levels, so their future returns are likely to improve,” says Kumar.

During the review, check the credit quality of your debt portfolio and ensure that around 80 per cent is in Aaa-rated papers.

Avoid tactical bets on longduration funds. “Rates could still inch up slightly. They are also likely to remain stagnant for some time. We are still away from that stage when interest rates begin to decline,” says Belapurkar.

He suggests locking into current yields using target maturity funds (TMFS). TMFS having three-five-year maturity are offering the most attractive yield-to-maturity and may be opted for, provided you have a similar investment horizon.