Business

Don’t overdo debt

Is there a good time to review your portfolio allocation and re-jig it? Ideally, this should be done periodically and the re-allocation based on how far you are from your goals. The beginning of a new financial year is as good a time as any to review. You can also tweak your investments based on announcements in the Union Budget, since the changes would be applicable from April 1.

The Budget has given more opportunities to invest in debt instruments, in the form of National Pension System (NPS), the Sukanya Samriddhi Scheme for the girl child and announcement of tax-free bonds. “Investors should be careful not to go overboard on debt investments through these instruments. One must maintain a balance between these instruments, which promote safety and trading instruments,” says Manikaran Singal, a Delhi-based financial planner.

The additional tax exemption for NPS gives immediate savings in the form of saved tax outflow, says Gaurav Roy, co-founder & operations head at BigDecisions.com. “You can increase your allocation to NPS. However, if you already have, say, a PPF (Public Provident Fund) account and are investing Rs 1.5 lakh in it, don’t pull money out of PPF and put into NPS. Both give tax benefits. Fully utilise the benefits of PPF (in this case) and then look at NPS,” he says.

However, if you have been investing in other instruments for your retirement which do not give a similar tax benefit, you can now put some of that into your NPS, to avail of this.

Another possibility for investors to factor in during the next financial year is a cut in interest rates. The Reserve Bank of India announced a 25 basis points cut in its repo rate after the Budget and is expected to announce more. Banks are likely to cut deposit rates after April. A cut in rates will have an impact on returns from fixed income instruments.

According to Anil Rego, chief executive, Right Horizons, the beginning of a year is a good time to do a financial plan, as you can account for potential income and expenses. “You can also look at taxation; usually, after a Budget, the taxes get re-set. And, if you are an employee you have to make a tax declaration,” he says.

Let us see how you can tweak your investment portfolio in the new financial year, depending on your age group.

25-35 years
Typically, those in this age group have a higher risk appetite. So, equity is a good option. You can have a portfolio mix of 70 per cent in equity and 30 per cent in debt. If investing in direct equities, look for sectors offering tangible returns within a period of one to two years. If not, investing in equity mutual funds is a better option. As the risk appetite is higher, investors can look at a portfolio of 75-80 per cent in mid-cap funds and not more than 20 per cent in large-cap funds.

Invest in mid-cap funds only through a Systematic Investment Plan (SIP) and not through lump-sum investment. “Don’t get carried away with the markets and don’t make changes in your portfolio allocation suddenly,” says Rego.

This is the age when many of us would look at buying a house, as banks would be willing to give longer-tenure home loans. But, at this point-of-time, real estate investment is not advisable, unless for self-occupation. “Property prices have peaked and the Budget has not introduced any measures to make real estate buying attractive. Instead, the increase in service tax will add to property prices. Besides, there have been no changes in the tax exemption on home loans,” says Divakar Vijayasarthy, co-founder of MeetUrPro, an online platform for investment and tax requirements.

As interest rates are likely to come down, you can look at corporate deposits. These offer higher returns than bank fixed deposits (FDs). Yet, it requires the same due-diligence as picking stocks.

35-45 years
You can continue with the mix of 70 per cent in equity and 30 per cent in debt. However, reduce the share of mid-cap funds to 50 per cent. “While large-cap funds will reduce the volatility, mid-cap will give growth. And, since you still have about 15 years to retire, you must have some amount of mid-cap funds,” says Singal.

You can also look at debt funds, where the realisation is better than bank FDs. Especially now, since it is a reducing interest rate scenario. In such a case, the yield to maturity is higher in debt funds. “If you hold for three years, you will get capital appreciation tax benefits, too, since it will be long-term. So, invest 35-40 per cent of your portfolio in income funds, with a three-year horizon. You can also look at Fixed Maturity Plans (FMPs),” says Vijayasarthy.

FMPs with a three-year lock-in are better than longer-term debt funds, as they can take care of the negative impact in case the interest rate cycle changes.

Balanced funds (investing in both equity and debt) are an option, too, for this age-group. Even if one asset class does not perform well, the other one will and, thereby, provide a cushion.

“Some equity funds have given returns as high as 50-70 per cent over the past year. In such a case, you can book some profit. But, remember to continue with your SIPs,” says Rego.

45 years and above
Those approaching retirement can look at transferring money from equity funds to a balanced fund through a Systematic Withdrawal Plan (SWP), Rego says. That will again give the cushion of both equity and debt. Within fixed income, 30 per cent can be in FDs and 70 per cent in debt funds.

“Ideally, there should be very little allocation to equities, since this age is vulnerable to job loss,” says Vijayasarthy.

Most investors don’t realise that they might already have some exposure to equity in the form of Unit Linked Insurance Plans or NPS, notes Singal.

People across all age groups can consider investing in NPS. However, do not blindly opt for the debt option in it. “Those at a younger age should utilise the 50 per cent equity option of NPS. It is a good accumulation tool for retirement funds. But, remember that the more you accumulate, the more will be your pension at age 60 years, which is taxable. So, allocate equally to PPF and equity funds to manage your taxable income at the time of retirement,” Singal says.

Gold
While investment in gold is not advisable since returns have been negative for some time now, it is one way of managing risk. Since most Indians buy physical gold, always account for that in your asset portfolio, too. Else, both the physical gold and the gold funds you buy would be in loss.

“As an asset allocation, you can have five to eight per cent in gold. If equity markets go down, you might find that it will deliver,” says Rego.