Freefincal Q/A 2: Lopsided asset allocation and rebalancing frequency

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Each week I try and answer generic questions on personal finance. Here is part two of this week’s edition. You can use the form below to ask your questions.
I understand that debt funds/bonds are inversely variable to the current interest rates. I hold some tax free bonds @7.2% & have invested in ICICI Pru long term fund. But the returns on them are dismal. In fact the NAV of both have fallen in the last 2 months. Where did I go wrong. When are the returns on the above likely to stabilize.

Pattu: If you buy a bond and do not intend to sell it, its current value as seen in your demat account is of no relevance to you. You will continue to receive interest payment at 7.2%.

The ICICI Long term fund is a dynamic bond fund. So it will always be fluctuating!

Hemant: I am using MPROFIT, but its mobile version is not available, do you tracker which you can see on mobile.

Pattu: Someday perhaps!

Devashish Patel: Considering, as the RBI governor has hinted, the interest rates are not going to fall anymore instead they may go up in the near future. In this scenario should one buy short term bond funds, or should one wait until the interest rates hikes are completed, and the rate cycle is reversed ?

Pattu:  Short-term bonds are relatively immune to rate changes. If you are holding long-term bonds and expect rates to move up, then it is time to get of them if you motive is to book profits.

Dilip: Thanks a lot for starting this innovative Q&A section. I am very confused between very basic yet very important differentiation between various MF type/schemes/category/sub categogy etc. and looking for a single platform where in can get the said information. Like confusion arises between categories like Diversified equity, ELSS equity, Multi Cap, Equity Growth etc and many more…. – Under Diversify how much ratio of Large cap, Mid cap and small cap equity companies similarly in multi cap what are those sub rarios? Please guide or drop a new blog article for clarity. Thanks in advance.

Pattu:  Mutual Fund classification is not set in stone. The categories are divided by pretty subjective definitions. I would suggest going to

Select funds using the category filters there, click on the portfolio tab and check the fund style box. How that varies across categories. Then go the specific fund pages in each category and study their portfolio styles. MorningStar can give more information than Value Research.

SRINIWAAS: Hi Mr Pattu, It’s very useful and giving more knowledge with your new Q&A edition. Thank you. My 1st question is .. i put equity debt funds ratio as 90% and 10%. Do we need to do portifolio rebalance between Equity and Debt (i use liquid funds) every month also, instead of 6 months or 1 year? My 2nd important question is little different Iam thinking every 1% of market up, my equity funds is also increased by 1% and is of about (say)1 lakh increase in fund value.. why don’t we switch these 1% up market days to switch to liquid (my funds are >1 year) and if we get such 100 days in a year, we get 100% of returns in a year. Also, my confusion is when can we switch back from liquid to Equity at again 1% fall down or waiting for 5% fall down? is my thinking right in equity mutual funds or what is better method? Best Regards Sriniwaas

Pattu: If you are goals are far away, it is enough if you rebalance once a year. I would also recommend lowering the equity allocation a bit.

You can do the kind of switching you are talking about, but there would loses in between those 1% days and the quantum of increase will not be the same.  There is no need for such management in my opinion. Of course, if your equity allocation dips due to a crash, you can rebalance by shifting from debt to equity.

Read more: How to Rebalance Your Investment Portfolio

Harinarayanan K K: Hi I am quite new to investing. I started putting money into PPF 2years ago. So it has some money now. Recently I started investing using SIP’s. However since there is an accumulated balance in PPF my current investment ration would be 30:70 equity:ppf. Is it ok if I invest completely in equity for around 2 years to make this ratio into 60:40 ? Or does this increase the risk ?

Pattu: No.  Please continue investing in equity in the same way. Over a few years, the asset allocation will change to the level you desire. Do no invest only in equity. Such lopsided asset allocation is quite common. There is no hurry to correct it for long term goals.

Asheesh: Dear Sir, Is there any means to measure dividend yield received from stocks in fund portfolio in growth option. So as to get what actually fund is getting irrespective of market speculative values which comprise NAVs. In Dividend option we can have some kind of information over dividend declaration. But for Growth options I could not find way to measure how much my portfolio urns from dividend declared by companies.

Pattu: You know the stocks in the fund once a month. You can use that to check the dividend yield independently. I do not think such an analysis provide any useful information about the fund. NAV depends on market value. Not much can be done about that.

Dividend declared by the fund HAS NOTHING TO DO WITH dividend declared by stocks. The fund manager books profits and pass it off in the name of dividends.

Read more: When do mutual funds declare dividends

Mrs. Samant: Hello Pattu Sir, Can you give me advice on investing annual bonus amounting to say Rs. 1L? This is apart from regular monthly investments in stocks/MFs/PPF/FDs. (Tried looking but could not find an answer on your website) Thanks much!

Pattu:  If you have 3 goals (say), divide the bonus in as many ways (ratios as per your choice) and invest more in the current instruments.

Krishnapratap: Hi Pattu Sir, 1. Is Equity MF safer than Debt MF or everything in Equity & MF world are risky? 2. Why we should have diversified portfolio? 3. Is Real Estate Investment riskier or safer than Equities or MF? 4. Is investment in Gold/Silver recommended for daughter’s marriage which is some 25 years away from now? Best Regards, Krishnapratap Vedula

Pattu: Please search for previous articles on these topics. I have covered each of them in detail.

  1. Is Equity MF safer than Debt MF or everything in Equity & MF world are risky?

Risk increases progressively from liquid funds to sectoral equity funds. See: The key to successful mutual fund investing

  1. Why should we have diversified portfolio?

See: Diversification will lower investment returns! and risk. That is why!!

  1. Is Real Estate Investment riskier or safer than Equities or MF?

No idea as the market price is not available.

  1. Is investment in Gold/Silver recommended for daughter’s marriage which is some 25 years away from now?

You only need money to buy gold.  Buying physical gold for marriage 25Y away maybe a bit early. You can invest via an equity-oriented balanced fund.

See: Smart ways to accumulate gold for a marriage

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And I will respond to them next week. I welcome tough questions. Please do not ask for investment advice. Before asking, please search the site if the issue has already been discussed. Thank you.

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