Financial Resolve 2012 – Tracking & Rebalancing our Portfolio

Most of us, especially working professionals are investors even without our design. We are forced to invest money in PPF, ELSS schemes, bank tax saving fixed deposits for tax-saving and even may buy equity if we find it attractive.

Many others among us invest on impulse - get a ‘tip’, listen to a colleague and invest! Still others - informed investors, make an investment in a product of their liking at random, without sticking to a strategy.

However, randomness would finally end up in investors succumbing to greed - buying high in a bull market - and fear - selling low in a bear market.  Since we can never predict when that unknown torpedo will come out of the dark and smash the price of a stock and some of our investments, the question is: what do we do to build a portfolio systematically, take profits and at the same time reduce risks.

The answer: Have a deliberate tracking and rebalancing strategy – our financial resolve for 2012:

What is this?

A simple rebalancing strategy is explained below

First evaluate your portfolio – how much you have and invested where. If you have not done this evaluation before, you will probably be in for a surprise!!

Next, a decision should be made based on our risk profile and goals as to how much one should invest in equity and how much in debt and investors may take assistance a financial advisor. In equity we include shares, equity mutual funds and we include fixed deposits, NCDs, bond funds, PPF in debt. (Investors can even include other asset classes like gold, real estate etc)

Let us say we have deliberately decided to have a 60-40 equity-debt ratio allocation. Rebalancing is the deliberate, periodic realigning of a portfolio of investments to bring it back to the original target asset allocation. This way we systematically capture returns and reduce unintended risks created by over-exposure to one category.

An example would help us understand rebalancing:

Let us say we have decided to have a 60-40 ratio and have invested Rs. 60000.00 in Equity Mutual Funds and Rs. 40000.00 in Debt – comprising of FDs, Debt Funds etc. on January 01, 2012.

Assuming the debt portion is worth 42000.00 on June 30, 2012. Let us assume that the market was good and the equity portion has gone up to 78000.00. This would mean that the equity to debt ratio in your portfolio is 65-35. Now after taking stock, the investor reduces exposure in equity in  and invests in debt.

If however, equity has gone down, then one should reduce debt and invest in equity to bring the balance back.

So how do I go about this?

For a start 

• Evaluate your current portfolio
• Decide the allocation. Investors may take assistance in this from a financial advisor. 
• Mutual Funds, with the wide range of schemes and advantages for retail investors form a good avenue of investment
• It will be difficult to make an exact ratio and you may allow yourself a small gap -for e.g. equity may go between 57% to 63%
• Follow a policy of checking and rebalancing every 6 months - i.e moving assets to maintain the proportion

Point to note:

Investments  can be made as an SIP to gradually bring up your equity level. Assistance from a financial advisor is recommended for those who don’t have time to construct a portfolio.

For working professionals this would help achieve:

Discipline and awareness of the portfolio and its performance

No random investments made out of fear or greed. Without a well laid-out rebalancing strategy, investors could be driven by greed to buy late into a bull market, or driven by fear to sell late into a market going down.

Risk reduction due to the rebalancing

If one component has deviated away from the originally intended target asset allocation, rebalancing is required



       Happy and profitable investing in 2012!


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