Delay your asset reallocation, take a call on debt after a few months.
With the beginning of the financial year, a lot of investors will be thinking if it's a good time to rejig their portfolio. And, with good reason.
Most would find that their debt-equity ratio has become completely skewed in favour of equities in the last one year. The Bombay Stock Exchange Sensitive Index, or Sensex, has moved to 17,500 from 8,000 levels during the period.
Data from Value Research, a mutual fund research agency, reveals that average returns from all categories of equity funds were in the range of 70-137 per cent in the last one year. Debt has not done so well. Average returns from all debt fund categories stood between 3 per cent and 6.7 per cent.
In other words, if one had invested Rs 5,00,000 in a debt-equity ratio of 30:70 in the beginning of 2009-10, the equity component (Rs 3,50,000) would be over Rs 6,00,000. The debt component (Rs 1,50,000) would have risen a mere Rs 5,000-10,000.
Assuming that the portfolio value now is Rs 7,60,000 (equity Rs 3,50,000 - 6,00,000 and debt Rs 1,50,000 - 1,60,000), Rs 5,32,000 should be in equities and Rs 2,28,000 in debt to maintain the original debt-equity ratio of 30:70.
This would mean moving funds from equity to debt - Rs 68,000 needs to be taken out of equities and invested in debt.
Investment experts are not so sure if this is the right time to move money or reallocate portfolio. "There is no need really to exit equities now. One can look at debt only in May-June, when the interest rate scenario is more clear," said Deven Choksey, managing director, KRChoksey Shares & Securities Pvt Ltd.
He said though there was confusion because of the consistent rise in the markets, the news was mostly good. For one, there is clarity about corporate earnings, unlike last year. Even the global economy looks in a better shape.
Importantly, most frontline companies have sufficient cash. "Companies like Infosys, Reliance and Bharti have cash that will need to be deployed. So, one can expect both organic (expansion) and inorganic (acquisition) growth," added Choksey.
Other market experts felt that while a allocation could be done now, one need not do too much with the debt component. Profits from equities can be booked now and invested in liquid-plus funds, they say.
"Move the money back to equities through a systematic transfer plan over a six-month period," said Anil Rego, CEO of investment and wealth management firm Right Horizons.
Since the Sensex has been trading between 16,500 and 17,500 in the last six months, there is fear that a 10-15 per cent correction may take place. Taking the profits off the table would allow the person to invest again over time.
"Even if the Sensex were to go up to say, 18,500 points, the incremental gain for the investor could be marginal," said Rego.
Obviously, following this strategy would mean that the ratio would change, due to a rise in the debt component. But it makes sense because it will protect profits. Also, the debt equity ratio will be restored over a six-month period when the money gets reinvested in equities. The debt part, which has risen marginally, should not be touched.
With the financial year starting, investors do not have the option of fixed maturity plans that offer around 7-7.5 per cent. In addition, there will be double indexation benefits for staying invested for more than a year.
"In the absence of FMPs, I would postpone my decision for a few months more before investing in debt. The rise in interest rates may not be more than 0.5 or 1 per cent, so the investor does not get impacted significantly," said Rego.
Finally, one needs to account for the new money that will be invested in the coming year as well. Experts said that if the existing debt-equity ratio had already been breached, the new money should go into the segment that is lagging. That is, debt, in this case.
