It’s important to review your portfolio periodically

It’s time for a mid-term review of your portfolio. It’s a good practice to do so at pre-defined intervals or when major events happen,

Written by Brijesh Damodaran | Published: May 28, 2013 12:04 am

It’s time for a mid-term review of your portfolio. It’s a good practice to do so at pre-defined intervals or when major events happen,either in your personal life or in the economic environment. Strong positive sentiments in the US market,quantitative easing in Japan,which made the bourses there touch in a new high,and the temporary sanity in the euro zone had their impact on the asset classes.

Gold has gone into a downward spiral and is no longer investor favourite. This calendar year,the BSE Sensex has generated an absolute return of 0.63% and an annualised return of 1.63%. Gold has eroded your portfolio by more than 15% this calendar year. Debt,as an asset class,especially long-term bonds (investing period of more than a year) has generated returns in excess of 15% annualised. Moreover,investments carried out in long-term debt funds,in March and/or April 2013,have generated an annualised returns in excess of 30% in the interim period. Once again,the basics have come into play and it’s asset allocation that is the key to your returns. Asset allocation,which was the recommended approach,has ensured that investors who followed this method are sitting on a portfolio that has beaten the benchmark indices in the equity and debt space; and in alternative assets where gold has an allocation of 10-15% is not in deep red.

Recommended strategy

For those investors who followed this strategy of asset allocation,not much action needs to be carried out if the allocation and returns are in line with your initial portfolio strategy. For those who have not had a strategy or who had higher leverages in various asset classes,its time to revisit.

One good practice an investor should always follow is to have an Investment Policy Statement (IPS) in place,to record the expectations on returns and time periods for the portfolio management and portfolio rebalancing. This will serve as a sounding board on which actions can be effectively taken,rather than they being based on recent effect or euphoria/despair.

With inflation showing signs of improvement and commodity prices inching down,the current account deficit is expected to come down.

This,in turn,should also help balance fiscal deficit,which,in turn,should lower inflation.

All this should propel RBI action towards a growth-oriented approach,which should enable lower interest rates for the corporates and also for the general public. So,both equity and debt (long term) could shine. You need to park your funds for 3-6 months and short-term debt funds should definitely be a part of your allocation. For an horizon of one-year-plus,long-term debt funds could generate double-digit returns,which should offset inflation and generate a positive real return.

Chances of easy money in equity,as witnessed in 2006 and 2007,are much lower now. Equity investments in MFs need to be carried out with a five-year-plus horizon. With volatility all around,timing the market timing is a tough task.

The Sensex was at 19,580 in the beginning of the year. It dipped to 18,242 in mid-April and was at 20,286 in mid-May. With a dip of 7 % in a specific period and a recovery in excess of 11% in another month,the faint-hearted should definitely stay away or,alternatively,invest with a five-year-plus horizon.

In direct equity,again,it’s stock picking that will get you the returns. Also,you need to be patient with your stocks and allow them to grow. Typically,all asset classes do not perform together at the same time. So,that’s where you need to have an asset allocation,which is in line with your risk profile and,more importantly,your return expectations.

So,if you did not book profits in your gold portfolio,then the returns would have been wiped out. Profit,in real terms,is made when you sell at a price higher than the cost of acquisition. Investing is a process that should be simple and easy to comprehend. Do not allow emotions or biases come into play when you invest. Having your asset allocation in place will be your all-weather friend and guide.

Why asset allocation

* This calendar year,Sensex has given an absolute return of 0.63% and an annualised return of 1.63%

* Gold has eroded your portfolio by more than 15% this calendar year

* Debt,as an asset class,especially long-term bonds has generated returns in excess of 15% annualised

* Investments carried out in long-term debt funds,in March and/or April 2013,have generated an annualised returns in excess of 30% in the interim period

* Asset allocation has ensured that investors who followed this method are sitting on a portfolio that has beaten the benchmark indices in the equity and debt space; and in alternative assets where gold has an allocation of 10-15% is not in deep red

The writer is founder & managing partner of Zeus WealthWays LLP. With inputs from Saurabh Malik,principal consultant at Zeus WealthWays LLP

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