A friend of mine was telling me about a conversation she had with her father. The man is in his 60s and has made ample wealth in the stock market. He picked up a lot of stocks when he was working but never did sell them. The reason: he never needed the money.
So when his daughter told him to start offloading when the Sensex touched 12,000, his answer was the same: "I don't need the money."
But, as her logic went, that was irrelevant. At such a market (and at his age), it makes sense to book profits and pay no tax (since he has held all the shares for more than a year). And, since he is retired, put the money in safer options like bank deposits, liquid funds, debt funds and post office monthly income plans.
After all, she reasoned, "you never know where the market is headed, how the market could slow down if there is a liquidity crunch and when the next Bull Run will emerge."
If you find yourself a few years from retirement or even a decade away from retirement, give serious thought to rebalancing your portfolio.
Here we give you some suggestions though the actual percentages will vary depending on your age and how close you are to retirement.
Still courting only equity?
Equity is the only investment that consistently beats inflation and gives the highest return over time. But as you near retirement, it is wise to gradually lower the percentage of equity in your portfolio.
The reason being that equity is riskier, more unpredictable and volatile than other investments. Neither does it give an assured return like debt.
So to make money in equity, you need a much larger time frame that could be anywhere from three to five years at the least (depending on whether you invested at the peak of the last bull run or at the end of a bearish phase).
A young investor has an advantage because he can ride all the ups and downs of the market since age is on his side. Like my friend's dad who made a lot of money simply because he started investing at an early age.
But as you approach retirement, this flexibility reduces and you have lesser time to overcome your losses. Hence, it makes sense to be a little more conservative.
Don't sell all your equity holdings. Just reduce them and invest wisely in equity. Don't get misguided just because you are in the middle of a Bull Run.
Stick to good stocks and good diversified equity funds. Franklin India Prima, Reliance Growth, DSPML Equity, DSPML Opportunties, HDFC Equity, HDFC Capital Builder, HDFC Long Term Advantage, Prudential ICICI SPIcE, Birla Equity Plan and Reliance Growth are some of the funds that have given good returns.
You can look at balanced funds to help keep an exposure to equity while balancing it with debt. HDFC Prudence is a good pick in this category. So are Kotak Balance and Franklin Templeton India Balanced though the former is more aggressive with good returns and the latter more stable but does not give flashy returns.
Is your market-cap right?
Are you heavily invested in mid- and small-caps? By this, I don't just mean stocks but even mid-cap funds. Maybe it's time to gradually start reducing your dependence on them.
Sure, they may not be as racy as their large-cap counterparts but then again as you near retirement, you should not be looking at adding that zing to your portfolio but instead focusing more on stability.
No one is advising you to get rid of all the mid- and small-caps. Keep a few of them in your portfolio but don't let your dependence on it be too high.
We are not saying that large-caps would insulate your portfolio from the downside but they do have a better chance of survival.
Also, investing in mid- and small-caps does not always ensure great returns. Everyone buys them on the premise that they will be tomorrow's large-caps but that does not always happen. Mid- and small-caps are inherently more risky and being volatile, should the market turn, you are more likely to suffer if the majority of your holdings are parked here.
HDFC Capital Builder, Birla Mid Cap and Sundaram Select Mid caps are some of the good mid-cap funds.
Get rid of the junk
Now is the best time to get rid of those stocks you wished you had never invested in.
Or, if you find that your fund has consistently under-performed its benchmark and performed lower than its peers, it is time to exit because in this market you may still make a profit on selling.
It is not sufficient to just see if your fund is making profits. Always compare the results with its peers in the same category. Also compare the results with the fund's benchmark.
The fund would be benchmarked against an index. Has it consistently underperformed or beaten the index? That means, when the index fell, did this fund fall by a lower percentage and when the index rose, did it rise by a higher percentage?
Get goal specific
If you are in your 40s, then it may make sense to divide your portfolio based on which goals are going to materialise immediately.
For instance, if you have a child who is 15 years old and you feel you may need the money to send him to a good college or get a professional degree soon, then your could invest in fairly safer instruments. Book your profits in equity and put the money in safer instruments like debt funds or a fixed deposit.
Consider liquid funds only if you have to deposit your money for a short time frame of less than a year. A one-year return as on April 27, 2006 would be around 5% which is better than a savings bank account return of 3.5%.
On the other hand, if you are saving for your 10-year-old daughter's wedding, then you could afford to be a little more aggressive. Because here the time horizon is around 15 years (assuming she will get married at 25), you can go for equity. Here a diversified equity fund or some good stocks should do the trick.
Juggling all the options
When looking at your portfolio, consider your tax saving instruments too.
So consider an Equity Linked Saving Scheme (tax saving mutual fund) when looking at your equity investments. Similarly, your National Savings Certificate, Public Provident Fund, infrastructure bonds along with along with your debt and liquid funds, fixed deposits and other corporate bonds.
To wind up, please don't view any of the above suggestions individually but look at all of them in totality. Or else, your portfolio may be in a bigger mess than when you started reshuffling it.
The funds mentioned above are based on past performance and are no guarantee for future performance. The list is not comprehensive but jsut indicative. Neither are they "tips" but just broad recommendations to consider.
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