Maintain the right balance
It is prudent for investors to rebalance their portfolios at regular intervals to match their asset allocation with their changing risk appetite.
Nobody likes losers. Certainly not Anand Talwalkar. The Mumbai-based PSU manager has been ruthlessly kicking out the underperforming funds from his portfolio. Out goes the JM Small & Mid-Cap Fund. It has earned 12.8 per cent in the past one year and lost 21.32 per cent every year since October 2007.
The category average has been 24.6 per cent in the past year and 4.38 per cent in the past three years. Before you say good riddance, look at the other funds Talwalkar has sold. The SBI Magnum IT Fund has earned 37 per cent in the past year, but has been abandoned.
With a 17.9 per cent annualised return, the DSPBR Micro Cap Fund has been the second best performer between the peak of 7 January 2008 and 15 October 2010. It has also been thrown out.
"I am not only getting rid of underperformers but also the more risky sectoral, small-cap and mid-cap funds," says Talwalkar. This dispassion is crucial if you want to win in this market. At 49, Talwalkar is 10-odd years away from retirement and wants to progressively reduce his exposure to volatile assets. The current stock market rally has given him a perfect opportunity to do so.
"It's a good way to reduce my equity exposure," he says. Talwalkar has not sold off his entire portfolio of equity funds. He has just rebalanced it to match his current risk appetite and desired asset allocation.
That's something you should also be doing with your portfolio. If you have a sizeable amount invested in the market and the surge in equities has drastically changed your asset allocation, it may be time to rebalance.
This means taking some hard decisions, but it will help restore the original mix in your portfolio and reduce risk.
Before thinking about rebalancing, you need to determine your asset allocation, and then find out about the existing mix. If it is too different from the desired distribution, you could, say, offload some equities and reinvest the proceeds in debt.
You could also tweak this by stopping further investments in equities and channelising all incremental investments to debt.
The rebalancing exercise should be undertaken once in 12-18 months. "If you do it frequently, it amounts to timing the market and defeats the whole purpose," says Tushar Pradhan, CIO of HSBC Mutual Fund (see interview).
To the lay investor, rebalancing may seem counter-intuitive. Who in his right mind would sell his stocks when the market is on an uptrend? Besides, haven't financial wizards like Warren Buffett said that the ideal holding period for stocks is forever?
This is true, but asset allocation is a time-tested technique that can help you earn better returns than a 'hold forever' strategy.
Sounds unbelievable? We back tested this theory for an investment made five years ago. The asset allocation was 60 per cent in stocks and 40 per cent in debt.
If we assume that the equity portfolio has matched the rise in the Nifty since October 2005 and that the debt portion has earned 8 per cent, the 'hold forever' investor has earned a lower return than the asset allocator who rebalances his portfolio once a year.
The latter may have earned less in 2007 because he pruned his exposure to stocks, but rebalancing helped him gain from the low stock prices in October 2008.
It was asset allocation that nudged him to reduce debt and add equities during those gloomy days when everybody wanted to get out.
In a bull market, rebalancing is profit booking by another name. This is the reason experts are advising clients to book profits now. "You cannot control the risk on the way down. You have to control risk on the way up by prudent allocation and profit booking," says Kenneth Andrade, head of investments at IDFC Mutual Fund.
However, rebalancing is not required if your fund manager is careful about the risk in the portfolio. As the MONEY TODAY-Value Research Model Lifestage Portfolios show, a good mutual fund will tweak its portfolio by itself to match the mandated asset allocation.
According to Amfi data, mutual funds have been net sellers in 2010 and have offloaded stocks worth Rs 22,663 crore since the beginning of the year. So, your mutual fund manager may already have booked profits on your behalf.
Also, rebalancing is not relevant for all investors. If the portfolio size is small, there is no need to alter your investments. Delhi-based Arun and Madhuri Mishra invest Rs 6,000 a month in diversified equity funds and have no plans to stop their systematic investment plans (SIPs). For such investors, who put in small amounts at regular intervals, rebalancing is not required.
Courtesy: Money Today
The category average has been 24.6 per cent in the past year and 4.38 per cent in the past three years. Before you say good riddance, look at the other funds Talwalkar has sold. The SBI Magnum IT Fund has earned 37 per cent in the past year, but has been abandoned.
With a 17.9 per cent annualised return, the DSPBR Micro Cap Fund has been the second best performer between the peak of 7 January 2008 and 15 October 2010. It has also been thrown out.
"I am not only getting rid of underperformers but also the more risky sectoral, small-cap and mid-cap funds," says Talwalkar. This dispassion is crucial if you want to win in this market. At 49, Talwalkar is 10-odd years away from retirement and wants to progressively reduce his exposure to volatile assets. The current stock market rally has given him a perfect opportunity to do so.
"It's a good way to reduce my equity exposure," he says. Talwalkar has not sold off his entire portfolio of equity funds. He has just rebalanced it to match his current risk appetite and desired asset allocation.
ARUN & MADHURI MISHRA, 31 AND 30 YEARS Their Investments They put in Rs 6,000 a month through SIPs in three diversified equity funds. Their Strategy Now The Mishras are latecomers to the stock market, having started investing only in February 2010. At 12 per cent, their allocation to equities is far below the ideal level. Therefore, they do not intend to tweak their investments and want to continue with their SIPs. "We have realised that SIPs in good funds will see us through even if the markets are volatile." |
This means taking some hard decisions, but it will help restore the original mix in your portfolio and reduce risk.
Before thinking about rebalancing, you need to determine your asset allocation, and then find out about the existing mix. If it is too different from the desired distribution, you could, say, offload some equities and reinvest the proceeds in debt.
You could also tweak this by stopping further investments in equities and channelising all incremental investments to debt.
The rebalancing exercise should be undertaken once in 12-18 months. "If you do it frequently, it amounts to timing the market and defeats the whole purpose," says Tushar Pradhan, CIO of HSBC Mutual Fund (see interview).
To the lay investor, rebalancing may seem counter-intuitive. Who in his right mind would sell his stocks when the market is on an uptrend? Besides, haven't financial wizards like Warren Buffett said that the ideal holding period for stocks is forever?
This is true, but asset allocation is a time-tested technique that can help you earn better returns than a 'hold forever' strategy.
Sounds unbelievable? We back tested this theory for an investment made five years ago. The asset allocation was 60 per cent in stocks and 40 per cent in debt.
If we assume that the equity portfolio has matched the rise in the Nifty since October 2005 and that the debt portion has earned 8 per cent, the 'hold forever' investor has earned a lower return than the asset allocator who rebalances his portfolio once a year.
The latter may have earned less in 2007 because he pruned his exposure to stocks, but rebalancing helped him gain from the low stock prices in October 2008.
It was asset allocation that nudged him to reduce debt and add equities during those gloomy days when everybody wanted to get out.
In a bull market, rebalancing is profit booking by another name. This is the reason experts are advising clients to book profits now. "You cannot control the risk on the way down. You have to control risk on the way up by prudent allocation and profit booking," says Kenneth Andrade, head of investments at IDFC Mutual Fund.
However, rebalancing is not required if your fund manager is careful about the risk in the portfolio. As the MONEY TODAY-Value Research Model Lifestage Portfolios show, a good mutual fund will tweak its portfolio by itself to match the mandated asset allocation.
According to Amfi data, mutual funds have been net sellers in 2010 and have offloaded stocks worth Rs 22,663 crore since the beginning of the year. So, your mutual fund manager may already have booked profits on your behalf.
Also, rebalancing is not relevant for all investors. If the portfolio size is small, there is no need to alter your investments. Delhi-based Arun and Madhuri Mishra invest Rs 6,000 a month in diversified equity funds and have no plans to stop their systematic investment plans (SIPs). For such investors, who put in small amounts at regular intervals, rebalancing is not required.
"Any day is a good day to start investing in funds"  Tushar Pradhan We are close to the highs of January 2008. Is it time to be greedy or fearful? Being greedy or fearful hints at an attempt to time the market. Investors must realise that there is a clear distinction between stocks and mutual funds. Mutual funds should be seen as savings vehicles that give compounded returns over the long term. For fund investors, the market levels should not be a concern. They should only be worried about the period they can remain in the market to reap the benefits of long-term investing. They need not think about when they should enter. Just start investing-any day is a good day. Some analysts fear that the global markets might recede and that the US economy could slip into a double-dip recession. What is your perception? A global double-dip recession may be unlikely. Sure, the problems in the US economy are long-term and there can be no quick-fix solutions, but its authorities are taking steps to prevent a relapse of the recession. Long-term data shows that the growth after a recession is marked by volatile periods, but this does not necessarily mean a double-dip recession. Investors often get it wrong when markets turn volatile. What is your advice? It is counter-intuitive but true that small investors stop buying when prices are low and jump in only when the markets start moving up. If they look at the Sensex graph over the long term, they will probably wonder why they didn't invest when the markets were at 8,000 during the meltdown of 2008-9. Regular investing would have helped them benefit from the low prices. When and how often should fund investors rebalance their portfolios? The need for rebalancing arises when you have a sizeable portfolio. For the average retail investor, there may not even be a need to rebalance. Ideally, one can restructure the portfolio once in 12 months. One should not do this too often because it defeats the whole purpose. On the other hand, investors should not be blind to the developments around them. They should not leave the rebalancing to a predetermined date in a year. |
Courtesy: Money Today
