Archive for October 6, 2008

Do a Recce before the Recession

Publication: Business Standard, Mumbai; Section: Financial Planning; Date: October 19, 2008

Reduce high-cost loans, create a contingency fund and play long term.these are the only mantras to survive during a slowdown.

Headlines across most newspapers, a few days ago, were about 1,900 employees being laid off at Jet Airways. Of course, the company’s chairman, Naresh Goyal, did a volte-face the same day and asked employees to join back from the very next day.

But the reality is that there are troubled times ahead of us. Doomsayers are already talking that the “Great Depression”, which started in 1929, is already on us. And for many, it has just started.

Internationally, there are already stories of lay-offs and salary cuts for almost a month or so. And though the situation has not yet directly impacted India, sooner or later, there will be some trickle-down effect.

» Read more..

Plan To Diversify

Publication: The Times Of India Mumbai; Date:2008 Oct 14; Section:Your Money; Page Number: 25
A smart businessman, who had most of his investments only in business, realises the benefits of diversification
Deepak Shah, a business owner in his early forties, lives in Mumbai with his wife Radha and two daughters Rekha and Jyoti (both 12 years). He was absolutely focused on his business and had most of his savings tied to it. His business had grown well within a short period and like most owners, he invested most of the funds into business.
He always believed that his business was earning good returns and that there was no need to diversify. However, a sharp downturn and losses made him rethink on a strategy.
When we started the discussion, he felt that » Read more..

Churning for stability

Publication: Business Standard, Mumbai;   Date: 6 October 2008;    Section: Money Matters ;   

Rebalancing your portfolio is an important part of money management. Here’s when to do it and how.

All investors, depending on their risk profile, build up a portfolio consisting of different asset classes over time. Take for instance, Rahul Sinha’s portfolio. It includes fixed deposits, public provident fund, post office deposits, life insurance policies (all taken for tax-saving and investments), mutual funds, stocks and gold.

Asset Type  Percentage 
                 of Portfolio (%)  Portfolio Allocation (Rs)
Cash               10                     10 lakh
Debt               30                     30 lakh
Equity             50                     50 lakh
Gold ETF          10                     10 lakh
Portfolio Value = Rs 1 crore

Often Sinha is faced with a situation, where one part of his portfolio gives steady and good returns and the other part performs dismally. Currently, when his mutual funds and equity investments have fallen by over 20 per cent, his debt investments are giving steady returns. His constant worry: should he move money from equity to debt and rebalance the portfolio or should he continue with the same debt-equity ratio?
Asset Type  Percentage
                 of Portfolio (%)     Portfolio Allocation (Rs)
Cash              10                     20 lakh
Debt              30                     40 lakh
Equity            50                     40 lakh
Gold ETF         10                     40 lakh
Portfolio Value = Rs 1 .2 crore

Rebalancing a portfolio is an important aspect of financial planning. Depending on the size and nature of the portfolio, you should take stock every six months and rebalance, if required. It is like conducting routine maintenance of your car that is needed on a regular basis. As the value of your assets changes (equity, gold, real estate and debt) with different market conditions, you deviate from the original asset allocation. In order to maintain the asset allocation, you need to tinker to avoid over-concentration or getting underweight in any one asset class.

Additionally, as you near your financial goal, you must certainly rebalance your portfolio and move assets from equity, gold or real estate into debt and cash. Do it at least 18-24 months before the goal, if the market is on the rise or if you have already created the wealth that is supposed to cater to specific needs.

If the market is bearish, you could postpone till you are 6-12 months closer to the goal. Ideally, you should target strong growth in the earlier years of the goal by investing in equities and then move towards debt and cash as you near your goals.

All this will vary based on the type of investor you are, your behaviour towards risk, your capacity to take risks and the returns that are needed to achieve these goals.

Let’s take a look at a Sinha’s asset allocation. Based on his financial condition and ability to take risk, the portfolio looks something like this. Earlier, his portfolio looked something like this.

His equity allocation was 50 per cent (Rs 50 lakh) and his debt was at 30 per cent (Rs 30 lakh) See Initial Portfolio. However, with a fall in the market, his debt has gone up to Rs 40 lakh and equity has fallen to Rs 40 lakh. Also, his cash and gold positions have doubled to Rs 20 lakh each (See Change in Portfolio).

So though his net worth is up, his asset allocation has deviated by more than 10 per cent for most assets. Hence, it could be a good time to change. Sinha is an aggressive investor because he has 50 per cent of his assets in equities. To attain 50 per cent back in equities, he has to buy another Rs 20 lakh of equities, which he can do by selling his gains from gold and debt and a portion of cash. This ensures that he sells at a higher point in other assets and buys at a lower level in equities.

The costs, as you can see, are substantial. That is, if you rebalance in less than a year, the cost of rebalancing would be Rs 3.39 lakh. After two years, the same re-allocation will cost Rs 1.13 lakh.

However, there is another important point. Though the cost of rebalancing is higher in the short term, there are gains in gold ETFs (Rs 10 lakh) and the cash position has improved by Rs 10 lakh. In such a case, it does make sense to book profits, lest the tide turns against a particular asset class.

In our example, the investor has actually gained in his cash and gold positions to effect the rebalance. There could be circumstances where the value of the entire portfolio is down. In such circumstances, it makes sense to sit tight sometimes or speak to a financial planner before coming to any decision.

The writer Amar Pandit is director, My Financial Advisor

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