Abalanced diet for a 6-monthold differs radically from that for a young adult or a 60-year-old. Just as our food requirement varies for different life stages and necessitates a change in our habits, so also with our finances. Our financial goals and needs keep altering at different points in our lives and require investment decisions in keeping with these changes. Proper adjustments, characterised by investment rebalancing, are needed to keep our finances in good shape.
REBALANCING A PORTFOLIO
For most people, life's goals include short-term or long-term financial milestones, such as buying a house, education for children, building a retirement corpus or simply an emergency fund. Life stage is the situation an individual is in at any given point of time. So the financial requirements of a young, unmarried BPO employee will differ from those of a couple with kids or an individual nearing retirement.
The first step towards rebalancing a portfolio is to have an asset allocation -distribution of investment among various instruments such as equities, debt, gold or real estate-based on one's goals and life stage. One must remember that the return one gets in the long term is more a function of asset allocation than of the return generated by each asset class.
So, while restructuring your portfolio, redefine your financial goals and draw an investment plan based on your life stage. Assess your finances and, if required, carry out the investment rebalancing with the help of a financial adviser. However, too frequent a rebalancing will lead to higher transaction costs and tax liability.
Let's consider two examples of portfolio rebalancing, one based on goals and the other on life stage. Suppose 27-year-old Amit starts investing Rs 2,000 per month in a diversified equity mutual fund so that in 10 years he has Rs 4 lakh as down payment for a Rs 20 lakh car (ignoring inflation).
Assuming that the fund gives 15 per cent annualised returns, Amit will have the required amount within 8.5 years. At this point in time, his goal is still 1.5 years away. The investment rebalancing approach based on life goals would suggest that he switch from the equity fund to a capital protection-oriented fund to ensure that he has the required money at the time he wants to purchase the car.
As for restructuring based on life stage, consider Neha, who is set to retire in a few months and will require Rs 25,000 per month as household expenditure. Currently, a large part of her investments is in equities and real estate, and a small portion in interestbearing fixed deposits, which give her Rs 15,000 in interest per month. Though her equity and real estate investments have given good returns, her adviser suggests selling a part of it to reinvest in interest-bearing instruments to increase her interest income to Rs 25,000.
TIMELY REVIEW
Remember to review your investment portfolio on an annual basis. Today, a majority of the investment rebalancing is done to chase returns. If one considers investor records, the results are disappointing. One should not be overwhelmed by emotion-euphoria or pessimism- or by the market levels while taking an investment rebalancing decision. The markets are here to serve you, not guide you.
VIJAI MANTRI
MD & CEO, Pramerica Asset Managers
