Time to rebalance your portfolio

Stock market has crossed 20,000 marks and everybody is looking for an all time new high in the coming months. At this juncture many people, who made good profits, will be very happy, and who failed to participate in the rally, will be seriously looking to invest in the shares or in mutual fund schemes. Before investing or staying invested, one should ask, whether this is the right time to enter or stay invested or to wait for correction or book profit. Most of the investors will be confused as what to do at this stage. The following are some assessment, which one should consider before taking final call.

Current facts of market:

1) Market has already moved up by 150% from the bottom of 8,000 marks without major correction in last 18 months.

2) GDP growth was above 9% for the year-end March`06 to March`08 when market touched 21000 and for current year it will be around 8% to 8.5%.

3) Current market PE is near to 24, giving some alert signals.

Let me first clarify that neither I am trying to time the market, nor I am predicting market movements to go up or down. I am just trying to highlight the basic principles of financial planning, i.e. ART

A - Asset Allocation
R - Risk Appetite
T -Time horizon.

Asset Allocation plays a major role in deciding your returns over a period of time. Your portfolio returns more depends on asset allocation than fund performance. Asset Allocation means balancing between risk and reward by investing in different kind of asset class such as Equity, Debt and Liquid instruments. In simple words it means do not put your all apples in one basket. Invest according to your risk appetite, time horizon and defined future goals, but never forget your asset allocation on any given point of time. Different asset class has different levels of risk and returns.

Thumb rule is that 100 minus your age, you should invest in high-risk asset class such as equity and real asset. The sum equal to your age should always go to fix or debt instruments such as Bank FDs, Postal Schemes PPF and Debt or Liquid Funds. Asset Allocation once decided should be followed seriously and accordingly should be rebalanced periodically. Rebalancing is the process of restoring your portfolio back to its original asset allocation. Rebalancing generally should be done every year or when you get some good profits from one asset class like today. You should also rebalance it 2 to 3 years prior to reaching your goals.

Let us take an example:

Mr. Hitesh aged 40 years has decided to invest, as per his asset allocation, in the ratio, 60% in Equity, 35% in Debt and 5% in liquid funds. He has invested Rs. 10 lacs last year on 01.09.2009. Accordingly he has invested 6 lacs in equity, 3.5 lacs in Debt and 0.5 in liquid instruments.

After one year his value in Equity has gone up to 9 lacs (50% growth), 3.78 lacs in debt (8% growth) and 0.52 lacs (4% growth) in liquid funds. His total investment has rose to 13.30 lacs giving him over all return of 33% on his total portfolio. Now his investment is 68% in equity, 28% in debt and 4% in liquid funds. This clearly shows that he has more investment in equity compared to his original asset allocation and need to book profit and allocate the profit to debt and liquid funds.

He has to book profit up to 1.02 lacs from equity and has to reallocate 0.88 lacs to debt and 0.14 lacs to liquid funds. This will again bring him to his original asset allocation at his age. One should also keep in mind that after 5 years, you have to change your asset allocation and has to decrease equity exposure and increase debt allocation. In Hitesh case, at age 45, his asset allocation will be 55% equity, 40% debt and 5% liquid.

Rebalancing your portfolio:

Details	Equity	Debt	Liquid
2009
Amount	6 lacs	3.5 Lacs	0.5 Lacs
%	60%	35%	5%
2010
Growth	50%	8%	4%
Amount	9 Lacs	3.78 Lacs	0.52 Lacs
Rebalancing Portfolio
%	68%	28%	4%
Change	8%	-7%	-1%
Amount	102000	-88000	-14000
Action	-102000	88000	14000
Net Investment	7.98 Lacs	4.66 Lacs	0.66 lacs

This rebalancing of portfolio will always keep Hitesh in win-win situation. Market movements will less affect him, whether market goes up or down. It is always advisable to rebalance the portfolio as per asset allocation.

Before taking any investment decision one must do some homework and exercise and check ART first. If you are confused and unable to take any decision, just follow the basics.

1) Book Profit if you are getting extra ordinary profit.
2) Continue your current SIPs.
3) Do not put a lump sum amount rather split it to SIP.
4) Rebalance portfolio as per your asset allocation.

Asset allocation and rebalancing your portfolio is a key to success and financial freedom.