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| Rebalance the portfolio often in volatile markets |
| BS Reporter / Mumbai Mar 08, 2009, 00:10 IST |
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You should rebalance your portfolio. It will protect your investments against the downside when markets tank. Periodic rebalancing will help you reduce your exposure to more risk than you can handle.
Ideally, an investor should rebalance portfolio once a year. In volatile times, you can also go for quarterly rebalancing. This will ensure the right balance in your asset allocation. When you are nearing your investment horizon, slowly reduce your exposure to equity. Shift some percentage of your equity portfolio to debt every year. This will make your investments safe, and shift it to a more stable asset class.
Bear markets are a test of an investor’s patience and belief. These are difficult times for investors watching their investments decline in value day after day. But it is important that you continue investing during declines. They present an opportunity to buy at low prices. When markets turnaround, the realisation of this investment will be far more than the notional loss you have made currently.
When mutual funds pay dividend, they have to pay dividend distribution tax (DDT). Can an investor avoid DDT, if he chooses the ‘growth’ option? What is the tax liability incurred in the growth option?
-Chandrakant Gupta
Dividend distribution tax is a tax paid by the asset management company when dividends are paid. Although dividends received are tax-free in the hands of the investors, DDT is charged to the scheme. Eventually, it is the investor that loses out in the end.
If one chooses the growth option, then the DDT amount can be saved. There is no other tax component particularly for growth option. But there will be capital gains tax on redemption.
I have investment in some mutual funds that I want to discontinue. My investments have eroded by 50 per cent. Should I sell the current investment at a loss and pick units of other better mutual funds?
-Inder Pal Singh
Before you redeem, do a performance check on the current mutual funds. If the fund is a consistent one and has displayed its ability to perform in the past, then it makes sense to hold on to the fund. The current fall may have stemmed from the turbulent market conditions and it may do well in the future.
In case the fund you hold has not been a stable performer in the past, then it is better that you get out of the fund. Invest in a better fund with a proven track record. Keeping in mind the current dismal scenario, it is advisable to opt for well-diversified, large-cap funds with a consistent performance in the past.
About three years ago, HDFC Prudence fund was one of the top rated funds for a long time. I had made it the core of my investments. As per my risk profile, I was comfortable with its ratio of debt and equity. However, the fund’s performance has gone down. What is your opinion about the future of the fund?
-Amit Kher
The fund had delivered impressively till 2006. Since 2007 its performance has been average. The primary reason for such a performance is the determination to hold on to higher proportion of equity even in today’s falling market. This move has hit the fund.
The fund’s average performance in the last two years makes it just a reasonable offering. There are better balanced funds you may look at.
Will gilt funds recover if Reserve Bank of India (RBI) cuts policy rates further, which is highly anticipated?
-Naresh Mody
Gilt funds invest in government securities (G-Secs). These include central government dated securities, state government securities and treasury bills. These instruments are at the end of the maturity spectrum and, hence, very sensitive to interest rate changes.
Yields and bond prices move in opposite direction. When interest rates fall, the yields of government securities also fall and, in turn, their prices rise. When interest rates rise, their yields rise and prices fall. Hence, gilt funds do well in a falling interest rate scenario.
The yields of gilts are not only dependent on the interest rate outlook but also their demand and supply. The fall in the return of gilt funds on January 7, 2009 was due to the government announcing a $10-billion additional borrowing plan that day. This move increased the supply of gilts and hence yields rose.
If there are any fresh rate cuts in the future, the result would be decreasing yields and an increase in bond prices. This move will benefit gilt funds.
Value Research
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