A reader asks, “Thanks to the invaluable learnings in Freefincal articles/talks, after the last 3-4 years of sustained effort (nearly all of it after missing the Covid times in the market), I am close to bringing my target distribution from a ~0%: ~100% to 60%: 40% (Equity: Debt). I have tried to do it as conservatively as possible so that the deviation, even at the new juncture, was not too much from my risk tolerance levels”.
“I am very happy to have reached this point where I want to maintain it for the next few years, but I have a few basic doubts regarding the practical execution of the asset-allocation plan”.
“1) I understand that I should now think of resetting the asset allocation once or twice a year, but how should I handle the future monthly investments? So far, in the reset past, I was nearly all out on Equity to bring it to this level, but now, should the future investments be done in the same 60-40% ratio?”
“2) At the turn of FY, debt investments like PF / PPF / Sukanya tend to jump due to interest credit and new money put in them. In preparation, should monthly investments be done in a different ratio, say 70-30%, 80-20%, etc? How to account for this change at the turn of FY with the distribution. I’d appreciate it if you could clarify these two small points and help me start on this asset-allocation path”.
What you have achieved is remarkable. Going from 100% fixed to 40% fixed income is not an ordinary feat, regardless of portfolio size. I also admire that you intend to maintain 60% equity only “for the next few years”. This means you appreciate equity de-risking, which is crucial to investing success regardless of market conditions.
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In addition to this, as you have rightly pointed out, resetting the asset allocation, better known as portfolio rebalancing, is also crucial. However, this need not be done each year. It is enough to minimise taxes and exit loads if you rebalance when equity allocation exceeds 65% or falls below 55%. So, the reset is usually necessary once every few years. The reader later clarified that this kind of rebalancing with a 5% threshold is what he had in mind.
To ensure the asset allocation does not deviate because of the investments, you must invest only 60% of what you can in equity. The rest goes to fixed income (this includes any mandatory EPF/NPS contributions).
You don’t need to worry too much about the jump in fixed income allocation due to the interest contribution at the start of each financial year. This is not in our control. During your portfolio review, you can check the asset allocation once a year and take the case about rebalancing as mentioned above.
If you have the practice of investing Rs. 1.5 lakhs in PPF and SSY in the first month of the financial year, the asset allocation would go further askew.
There are two ways around it. (1) Spread your investment in PPF and SSY over the 12 months. Also see: PPF: Investing Before 5th vs. Investing After 5th. (2) You can invest the full amount in April and compensate for it by investing more in equity in subsequent months. You should ensure the annual equity and fixed-income investments maintain the 60:40 ratio. I wish you all the best.