Personal finance: Time to rebalance your portfolio

Removing laggards will bring your portfolio back into shape and prepare it for ups and downs

With both equities and debt doing rather well in the financial year 2017, most people wouldn’t like to disturb their portfolios in the coming year. But that wouldn’t be a wise decision.

The beginning of the financial year always a good time to review your investment portfolio. Not only do you need to assess the gains and losses you have made from your investment strategy, you also need to take a few essential steps like rebalancing the portfolio and removing the laggards.

First, review the performance of major asset classes and what experts are saying about their prospects for the coming year.      

Equities: While large-cap equity mutual funds have given an average return of 25.25 per cent over the past year, small and mid-cap funds have surpassed them with a return of 33.18 per cent. Harrish Zaveri, senior vice-president and fund manager, DSP BlackRock Investment Managers expects large-caps to do better in the coming year. "In the last two years mid-cap and small-cap stocks have done very well. Valuations of large caps are now cheaper than those of mid- and small-caps. Now you will see valuations catching up on the large-cap side. Also, the election results in Uttar Pradesh have brought in enhanced political stability for the next two years. This will give investors, especially those from abroad, a fair amount of visibility and they will want to be invested in large caps in India." Sectors like commodities, which were not doing well and were holding back the performance of large-cap stocks, have turned the corner. Zaveri expects banking, cement, auto and consumer durables to also drive the performance of the large-cap segment.

Debt: It has been a good year for debt mutual fund investors as well, with different categories clocking returns of 7-10.4 per cent over the past one year, amid a declining interest rate scenario. Those returns may not, however, get repeated soon. "We expect interest rates to be range bound, with the 10-year bond yield likely to be in the 6.75-7 per cent range for the next three to six months," says Sudhir Agrawal, executive vice president and fund manager (fixed Income), UTI Mutual Fund. He suggests that investors with a one-three year investment horizon should put their money in short-term income funds. Those with an investment horizon of more than three years may invest in income funds or dynamic bond funds. "If you are investing in a credit opportunity fund, ensure that it is well diversified," says Agrawal.

Gold: The yellow metal has been flat over the past one year (-0.85 per cent). By November 7, gold was up 21.46 per cent year-to-date for 2016. But with Donald Trump getting elected on November 8, political uncertainty ended in the international markets. His declaration that he would provide stimulus to the US economy through infrastructure spending came as a shot in the arm for the US equity markets. In the first week of December, the US Fed announced that it would undertake three interest rates hikes in 2017. When interest rates rise in the US, the dollar strengthens, and that is negative for gold. Since November the yellow metal has been declining. The strengthening of the rupee in recent times has meant that gold's performance in the domestic market has been worse than in the international market. Ajay Kedia, managing director, Kedia Commodities says: "We expect gold to appreciate in the third and fourth quarter of 2017 due to festive season demand." Investors should continue with an 8-10 per cent allocation to gold in their portfolio as a hedge against equity market downturn, geopolitical and economic uncertainty, etc.

Portfolio review

Both equities and debt have done well. Investors should, however, not expect such blockbuster performance to be repeated every year. "They should not make the mistake of allocating more money to equities, especially to mid- and small-cap funds, based on past performance," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.      

Rebalance: At the time of setting up your portfolio, you would have decided on a certain asset allocation. In the table, we have allocated 70 per cent to equity funds (75 per cent to large-cap and 25 per cent to mid and small-cap funds), 20 per cent to income funds and 10 per cent to gold.

With different asset classes giving different levels of returns, the asset allocation of the portfolio changes. In the example, allocation to equity funds has increased while that to income funds and gold has fallen (see row: Asset allocation at end of year). Hence, there is a need to sell a part of your holdings in the outperforming asset classes (both categories of equity funds) and put the money in the underperforming asset class (income funds and gold, in our example).

One advantage of rebalancing is that you sell high and buy low, which is what you wish to do with your investments. "By rebalancing you ensure that you get the level of exposure to different asset classes that you are comfortable with and the risk within your portfolio doesn't increase due to market forces," says Pandya.

Remove the laggards: To identify laggards, look at how individual funds within your portfolio have performed vis-a-vis their peers. If a fund is underperforming, give it a year to turn around. After that, put it on your watch list and monitor its performance for another six months. If the underperformance continues, get rid of it.

Risks: During the portfolio review, scrutinise your portfolio for hidden risks. Recently, NAVs of Taurus Mutual Fund's debt funds took a hit due to the downgrade of Ballarpur Industries' debt paper. "Ensure that the fund doesn't have too high exposure to individual papers or to a particular sector. Also, make sure that the quality of papers that your funds have invested in is sound," says Arnav Pandya, a Mumbai-based financial planner.

Finally, while carrying out the portfolio rebalancing exercise, keep costs in mind, such as tax and exit loads. "Sell only those funds where the cost impact will be minimum," says Dhawan.

How to rebalance Here, you need to sell from the two categories of equity funds and buy more of income funds and gold
	Large-cap funds	Mid &small-cap funds	Income funds	Gold	Portfolio size
Amount at start of year (Rs)	525,000	175,000	200,000	100,000	1,000,000
Chosen asset allocation (%)	52.50	17.50	20	10
Gain/loss during the year (%)	25.25	33.18	10.44	-0.85
Amount at end of year (Rs)	657,825	233,065	220,880	99,150	1,210,920
Asset allocation at year end (%)	54.32	19.25	18	8
Ideal asset allocation (Rs)	635,733	211,911	242,184	121,092
Amount to buy/sell (Rs)	-22,092	-21,154	21,304	21,942
Gain/loss during the year are actual changes seen in these categories