How to increase equity exposure in my portfolio loaded with fixed income?

Many investors recognise the importance of equity investing pretty late. Even if they have some SIPs running, the amounts are quite small compared to their fixed-income investments (EPF, FDs, etc). This means their portfolios are loaded with fixed income. Readers often ask how to increase equity exposure from 10% to 50-60%. A discussion.

In my case, I started earning and investing for retirement only in my early 30s. Like many others, I, too, had a debt-heavy portfolio for several years (close to a decade).

Only in the last 6-7 years have I hit the 60% equity and 40% fixed income mark. So, for someone who started earning in the early 20s with regular contributions to EPF and no contribution to equity, it would take many years to correct the asset allocation.

This is okay if several years are available for investing (15Y or more). Otherwise,  one cannot wait that long to reach 50% to 60% equity because the portfolio de-risking would need to start in the last decade before retirement.  More importantly, a person so used to seeing nice fixed-income returns would not be able to handle the volatility of equity.

It is easy to say “invest aggressively”. During a bull run, it would seem like an excellent idea. However, a crash (and it will) and, worse, a sideways market will come because of political or economic instability for 5-6 years.

So what can be done?

• Be realistic. Lower your peak equity allocation target to 35% or 40% if you have less than 15Y of investing left.
• Do a proper goal-planning exercise. Determine the retirement corpus required.
• You can use the suggestions of the freefincal robo advisor’s automated asset allocation schedule as a guideline.
• If you don’t have much time and need to customise the recommended asset allocation schedule, use our goal-based Portfolio Review/Audit Tool to adjust your asset allocation and investment amount required to determine how close you reach your retirement corpus.
• Remember that at retirement, your equity corpus should not be more than 30% to 35%.
• Doubling equity exposure should take at least 2-3 years, depending on the amount you can invest and your risk awareness (not risk appetite!). Tripling equity exposure should take about 4-5 years in total. Market conditions will also play a big role.
• Assuming it would take five years to go from 10% to 30% equity, how much more time do you have to keep increasing equity to 40% or even 50%? Again, remember that it is inadvisable to keep increasing equity allocation in the last decade before retirement. So any increase is best done before that.
• You can use the above-mentioned portfolio audit tool to adjust the asset allocation in future years with reasonable return expectations.
• Finally, remember that a high investment amount may be necessary to account for the lower equity exposure. If you cannot afford to invest that much, you will have to change the assumptions made in the retirement plan – lower expenses, inflation estimates, and postpone retirement. This would imply expecting a lower standard of lifestyle in retirement.
• No matter what you choose, never upgrade your lifestyle unnecessarily in future.

What to invest in equity? Avoid mid cap and small cap funds. While a Sensex or Nifty index fund would be ideal, those desirous of lower return volatility can consider a multi-asset mutual fund. For recommendations, see Plumbline: Handpicked mutual funds.