The market fall in the past few months, due to the COVID-19 pandemic, has seen almost everyone invested in equities go deep in the red. This market fall meant that the debt toratio would be looking skewed thanks to the lower value of the portion.
Investors now need to make informed decisions to bring theirback in alignment to their long term and short-term objectives.
What exactly is?
When you, you end up in something that belongs to one of the following classes:
2. Debt or Fixed income – FDs, RDs, Bonds, , NCDs,
3. Precious metals – Gold, Platinum, Silver
4. Real Estate – Commercial or Residential properties and land
5. Others – Forex, Cash, Art or Crypto
Most financial wealth is invested in the first two. Bothclasses are needed for different needs and depending on the objectives and time horizon, allocation also varies.
This split of your wealth between multipleclasses – how much in each is generally known as . The aim is to stay invested in the right class to generate a required growth rate, for the right need and with the right amount.
What is the ideal portfolio – market crash or no crash – based on objectives?
More than a generic 50:50, or 60:40, one needs to understand what they hope to achieve first.is all about you as an investor, ensuring that you deploy your savings into various classes such that your objectives, both long-term and short-term, are met effectively and efficiently.
For example, if you anticipate a need for the short term, then take it into account in your fixed income. A good thumb rule is that the money required for your needs for the next 3-4 years make up your fixed income allocation. Stability and liquidity over trying to beat inflation.
The money you need for your long-term objectives and needs, such as acorpus, as well as higher education needs of your children, should be invested in . The main goal here is above-inflation rates over a decade or more.
Therefore a 60:40 allocation toand debt, respectively, would make sense if the 40% is enough to meet your needs in the immediate future. This should ideally exclude your (four months of income or six months of expenses, at least) which can make a lot of difference in times such as these with income uncertainty.
Anyin fixed income beyond 3-4 years of need horizon is expected to compromise your long-term objectives. For example, in a bank fixed deposit for your that is 10-15+ years away. Long-term goals require a more significant due to the size of the corpus which most investors will need.
The most pressing question on investors’ minds right now –portion of my portfolio has seen a 20%-40% fall – what should I do?
What would have happened to a typical debt-portfolio?
Market crashes play spoil-sport with even the most thought-through. Consider the below scenario with an average 60% and 40% debt-based .
The portfolio now has an over-allocation to fixed income and an under allocation to. This is not only suboptimal for this investor’s objectives but also gives an incorrect picture of where they stand vis-à-vis their objectives.
In case you have no surplus available, at this juncture continuing your SIPs in equity mutual funds is sufficient. Do not pause your SIPs anticipating a further fall. If asset allocation has shifted towards fixed income-based funds, then you can adjust your SIPs to allocate more towards equity funds.
What an investor can do in such a case is subject to:
1. Having a surplus available
In this case, if your fixed income allocation is sufficient for needs in 3-4 years, the surplus needs to be deployed into yourpart of the to bring the percentage allocation back to normal. Here are three scenarios, showing deployment of additional capital:
Scenario 1: 60%and 40% debt
Scenario 2: 70%and 30% debt
Scenario 3: 50%and 50% debt
As you can see, the amount you need to add is subject to yourplan. Work with a professional as your sub- (within – mid-cap, large-cap, diversified, etc) would also need tweaking.
Deploying the surplus:
2. What to do with existing ?
In case you have no surplus available, at this juncture continuing yourin equity is sufficient. Do not pause your anticipating a further fall. If has shifted towards fixed income-based , then you can adjust your to allocate more towards .
Most investors use a SIP toin , so the only tweaks that may be needed would be towards the specific category of .
Don’t forget your objectives
What you decide to do to yourshould always consider both your long-term and short-term objectives. Don’t focus too much on rates in the short term. In four to five years, returns are likely to be on track to beat inflation.
Finally, there is no point in correcting yourtoo frequently in a volatile market. It should only be a periodic exercise subject to alignment with your objectives.