Avoid discontinuing your SIPs. Persist for at least 7-10 years.
The start of a new financial year is an appropriate time to review your investment, insurance and loan portfolio.
Many issues crop up within these portfolios inadvertently.
An annual review can mitigate these issues before they balloon into major problems.
Equities have underperformed
Equity funds have performed poorly over the past year.
"Most investors who entered equity funds in the past two years have not made money," says Deepesh Raghaw, Sebi-registered investment advisor and founder, PersonalFinancePlan.
Many investors who switched from conservative to aggressive portfolios after the bull run of 2020-2021 would be regretting that move.
Avoid discontinuing your systematic investment plans (SIPs). Persist for at least 7-10 years.
"If you quit now, the same cycle will repeat itself over and over again: you enter at a late stage in a bull rally, the market enters a bearish phase, and you exit at a loss," says Raghaw.
Equities have underperformed both fixed-income products (debt mutual funds, fixed deposits, etc) and gold. Your portfolio may have become underweight on equities.
"The mantra of asset allocation requires that you increase your allocation to equities," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.
International funds have underperformed domestic funds. Alongside debt funds, these funds have also lost the indexation benefit during taxation.
"Continue your allocation to international funds to get the benefit of geographical diversification and to hedge currency risk," says Dhawan.
In the case of portfolios where goals are two years away, shift the money from equity funds to fixed-income products.
Check the performance of the actively-managed funds in your portfolio.
Compare the fund's three-year return against that of its benchmark and category average. Check the calendar year wise performance as well.
If the fund has underperformed only over the past year, give it at least one year to recover. If it has been underperforming in each of the past three calendar years, exit it.
Debt funds: Avoid knee-jerk reaction
From April 1, debt funds will be taxed at the investor's slab rate.
Long-term capital gains on equities continue to be taxed at 10 per cent on gains above Rs 1 lakh per year.
"The change in tax treatment shouldn't trigger a shift in favour of equities. Tax treatment shouldn't determine asset allocation," says Dhawan.
In view of the changed tax norms for debt mutual funds, classify all your debt fund units into two categories: those purchased by March 31 and those purchased after.
"If you have to sell, sell the newer units. One option is to put new money into a new fund from the same category. If you wish to invest in the same fund, start a new folio," says Raghaw.
Shorter-duration debt funds will not be impacted by the change in tax rules.
"When deciding whether to invest in debt funds or in fixed deposits of comparable tenor, don't go by the past returns of the former. A portfolio's yield-to-maturity is a better indicator of future returns," says Dhawan.
Enter longer-duration debt funds in a staggered manner. Limit your exposure to them to 25-33 per cent of your debt fund portfolio. These funds could provide you with mark-to-market gains when interest rates begin to decline.
Despite the loss of indexation benefit, debt funds still offer a few advantages.
One, tax doesn't have to be paid on them until redemption, which allows them to compound at a better rate.
Fixed deposits are taxed on an accrual basis each year.
Two, short-term capital losses on debt funds can be adjusted against short- and long-term capital gains elsewhere in the portfolio. And three, when rates fall, debt funds get the benefit of mark-to-market gains.
Fixed deposits: Ladder investments
When interest rates were going up, it was advisable to stick to shorter-term deposits. Now, the cycle is expected to turn over in the next 12 months or so.
Investors should try to manage reinvestment risk by laddering their investments, that is, investing in fixed deposits of varied maturities.
The government has hiked the investment limit in Senior Citizens Savings Scheme from Rs 15 lakh to Rs 30 lakh. The elderly may consider hiking their exposure to get the benefit of a guaranteed return.
Gold, the outperformer
Gold has outperformed both equity and debt mutual funds.
A large portion of this return has come on account of the 7.8 per cent depreciation of the rupee against the dollar over the past year. Ideally, most investors should have a 10 per cent allocation to gold.
"If you have fresh money available, use it to buy more of an underperforming asset class to rebalance your portfolio. This mode of rebalancing is more tax efficient," says Dhawan.
Liabilities up? Hike term cover
Buy more term cover if your liabilities have increased during the year, say, because you have taken a home loan.
"Also hike your cover if the dependence on your income has increased -- due to marriage, birth of a child, or because your child has gone abroad for higher education," says Indraneel Chatterjee, co-founder, RenewBuy.
With the cost of health care rising at an average rate of 15 per cent annually, you must increase the sum insured of your health policy periodically. Those living in metros must have a term cover of at least Rs 20 lakh.
"Consider buying a super top-up. If you already have a base cover of Rs 10 lakh, the premium of a policy with a deductible of this amount can be quite attractive," says Kapil Mehta, co-founder and CEO, SecureNow.
Tackle growing home loan burden
The 250 basis point increase in the repo rate since May 2022 has led to an increase in home loan tenors.
In cases where the tenor has gone past the retirement age, lenders have increased the EMI. Consider part-prepayment to bring the tenor and the EMI to more manageable levels.
Lenders have reduced the spread on home loans from around 3 percentage points in 2019-20 to around 2 percentage points now.
"If you have a good credit score, this is a good time to refinance your home loan," says Adhil Shetty, CEO, BankBazaar.
Remember that the spread will remain constant throughout your loan tenor.
Feature Presentation: Ashish Narsale/Rediff.com