Rebalancing Portfolio — help needed

POSTED BY Ram Mohan ON February 14, 2012 11:01 am COMMENTS (17)

All,
I’m 32 years old, married with 1 daughter (8 months old). After reading Manish’s book, I decided that my portfolio needs rebalancing.

Currently my portfolio has almost 0% debt in it. Here is the composition:

* Stocks — 2.3 lac
* mutual funds – 5.2 lacs
* FD — 35,000 πŸ™‚

As you can see, out of 8 lacs, only 35,000 is in Debt. I want to increase this to a ratio of 80:20 (equity to debt).

I have a couple of options here:

1) Increase my monthly SIP contribution to debt…So make it around 9,000 debt and 11,000 in shares and equities. (Till now, I was investing only 14,000 pm all in equities and shares. After reading Manish’s book, I’ve decided to increase the investments from today itself to 19,000). So slowly but surely my Debt ratio is going to go up.

2) Sell some mutual funds or shares and reinvest in debt. If this is a better approach, should I sell the mutual funds that made the most profit? My shares are spread across 20 different shares at around 10K a share

Finally, debt means what?? Debt funds, FDs or a combination of these? Moneycontrol portfolio manager lumps debt funds under Equities, so I’m a bit confused.

Yes, and this is not any goal based rebalancing. It’s a plain and simple rebalancing — step 1 for me. Once I get a Debt to equity ratio set, then I’ll go in for other goal based rebalancing

Thanks for your help and advice

17 replies on this article “Rebalancing Portfolio — help needed”

  1. Dear Rmohan, as of now things look OK to me. Please come here again in between as & when you feel the requirement of any inputs from forum members.

    Please feel free to post your queries, views.

    Thanks

    Ashal

  2. rmohan80@gmail.com says:

    Hi Ashal,

    Thanks a lot for your inputs. Here is what I’ve decided to do:

    1) Redeem SBI Tax Gain, SBI Global, Kotak 50 and ICICI Pru Top 50.

    2) Put all these into a HDFC Debt fund and do STP to HDFC Equity (this is going to be for my daughter’s education)

    3) Start new investments in Franklin India Blue Chip 5,500 p.m (pure Large Cap which my portfolio is lacking)

    4) Invest into Sundaram Select Midcap 5,500 pm. Point is both Sundaram Select Midcapt and BSL Frontline are similar players; however there is a lumpsum investment that I did few years back in BSL FL that I want to do a STP to a BSL debt fund to increase my debt allocation. So, till that is happening, I’ll be investing in Sundaram Select Midcap. Maybe once that is done, I’ll start investing back into BSL Frontline

    5) Start my PPF from April 2012 — invest 8,333 p.m there. So, no more tax saving ELSS for now for 80C

    3, 4 and 5 are for my retirement plan (19K PM for 25 years). Hope to have an early retirement by 56 πŸ™‚

  3. Dear Rmohan, If you want to do it SIP way, You may do so by redeeming from the Eq. fund, Investing in a debt fund & then applying for STP from dEbt Fund to Eq. fund.

    Thanks

    Ashal

  4. rmohan80@gmail.com says:

    Hi Ashal,

    The problem I face is that I’m not very keen on investing lumpsum into equity as that has never worked in my favor. Only SIPs have helped me generate profit in the past, so am a little paranoid about redeeming and investing as lumpsum into some other account

  5. Dear Rmohan, let me clarify. As on date your money is already invested in an Eq. fund (Icici Pru Top 100). Here we are not shifting money from Debt or not making fresh investments. We are just making a change in the fund where your money is lying at present to the new one. That’s why I asked for lump sum investment.

    Yes I do know, you can’t switch from IPru to Birla. So first redeem from IPru & then invest your money in one go in Birla Fr’line Eq.

    Thanks

    Ashal

  6. Dear Rmohan, Here is my take –

    1) HDFC Tax Saver (G) – Jan 2012 – invest more
    2) Princpal Personal Tax Saver (G) β€” Jan 2010 – switch once the lock-in period is over or for completed units, switch your money to HDFC Eq.
    3) ICICI Pru Top 100 FUnd (G) β€” Oct 2009 – Switch it to BSL Fr’line Eq.
    4) Birla SL frontline Equity A (G) β€” July 2010 – Invest more
    5) Kotak 50 (G) β€” SIP ongoing – Stop the SIP & divert the SIP to HDFC Eq. & Birla Fr’line Eq.
    6) Sundaram Select Midcap RP (G) β€” Jun 2011 – Switch it to HDFC Eq.
    7) HDFC Equity Fund (G) β€” SIP Ongoing – Ok invest more
    SBI Magnum Global Fund (G) β€” SIP Ongoing – Stop & switch it to HDFC Eq.
    9) Reliance Tax Saver (G) β€” Oct 2011 – Redeem as & when possible & switch it to Birla Fr’line eq.
    10) SBI Magnum Tax Gain (D) β€” May 2008 – redeem & invest in HDFC Eq. & BSL Fr’line eq.

    Thanks

    Ashal

    1. rmohan80@gmail.com says:

      Hi Ashal,

      Thanks for your reply, but i’m a little confused when you say “ICICI Pru Top 100 FUnd (G) β€” Oct 2009 – Switch it to BSL Fr’line Eq.”

      I cannot do a STP from 1 house to another. Are you suggesting I redeem and do a lumpsum investment into the other fund? The strategy of lumpsum investment into any MF has never worked well for me so far…

      Can you elaborate how I can do these switches?

      Thanks

      Ram

  7. Dear Rmohan, Please indicate the active funds with SIPs & the funds where you are not investing any more & the month when you had last invested in such non active funds.

    I’m not asking for out of curiosity. I seriously want to help you.

    Thanks

    Ashal

    1. rmohan80@gmail.com says:

      1) HDFC Tax Saver (G) – Jan 2012
      2) Princpal Personal Tax Saver (G) — Jan 2010
      3) ICICI Pru Top 100 FUnd (G) — Oct 2009
      4) Birla SL frontline Equity A (G) — July 2010
      5) Kotak 50 (G) — SIP ongoing
      6) Sundaram Select Midcap RP (G) — Jun 2011
      7) HDFC Equity Fund (G) — SIP Ongoing
      8) SBI Magnum Global Fund (G) — SIP Ongoing
      9) Reliance Tax Saver (G) — Oct 2011
      10) SBI Magnum Tax Gain (D) β€” May 2008 πŸ™ still in loss, unbelievable

  8. Dear Rmohan, out of those 5+L Rs. invested in MFs can you name your funds?

    thanks

    Ashal

    1. rmohan80@gmail.com says:

      In order of most profitable to least profitable

      1) HDFC Tax Saver (G) —
      2) Princpal Personal Tax Saver (G)
      3) ICICI Pru Top 100 FUnd (G)
      4) Birla SL frontline Equity A (G)
      5) Kotak 50 (G)
      6) Sundaram Select Midcap RP (G)
      7) HDFC Equity Fund (G)
      8) SBI Magnum Global Fund (G)
      9) Reliance Tax Saver (G)
      10) SBI Magnum Tax Gain (D) — Only MF in loss

      Is this just out of curiosity or do you have some suggestions based on this?

      Thanks,

  9. BanyanFA says:

    @ justgrowmymoney
    You may be right. But on a second thought, I was wondering that a person who would have exhausted the Rs. 1 lac PPF balance would be earning roughly 4-5 lacs per year. Though private companies exist who don’t tend to follow the PF rules, not many exist who :
    a) Don’t follow the rule; and
    b) Pay their employees so generously.

    Yes, you are right, once a person has exhausted their PPF & PF is not an option, then the next best option can be towards Debt funds. However, even then I might want to rather explore the Fixed Deposits / Bond / Debenture issue route rather than debt fund route.

    Regards
    BFA

  10. BanyanFA says:

    Hi,
    Unless you are NRI, the best debt product is invest either into PPF or PF. You can contact your employer to increase the voluntary amount of your PF contribution – which would be the first and preferred option.

    Investing into Debt mutual funds is not really a good option considering PPF & PF score much ahead of these funds.

    Regards
    Banyanfa

    1. Banyan – Though VPF can be contributed most private employers do not support this. I can vouch for dozens of such cases and can safely extrapolate this to the general salaried population.

      So after maximizing PPF and the regular EPF one has no much options left in debt. Tax free bonds that have showed up of late are an option. FDs/RDs are very tax inefficient so taking into ST Debt funds – Dividend option is perhaps a way to increase the depth of the debt folio after you exhaust the provident funds, practically speaking.

  11. rmohan80@gmail.com says:

    Hi Justgrowmymoney,

    Thank you for taking the time out for the lengthy and informative post. I would like to say that I don’t have EPF nor do I have any PF savings. So whatever i’ve posted is what I totally have. The FDs are maturing next month, so again my debt portfolio is back to 0 πŸ™‚

    But very valid suggestion on how to to get my portfolio to a 80:20 ratio without just selling some equity. Valid suggestion on # of stocks to keep too

  12. Mohan – You have opened up a very interesting discussion. Lets start with defining Debt and Equity – though most of us know what they mean.

    Debt – A loan given to a firm to run their operations. A fixed return is assured for the time duration the loan is in effect. Since private operations are definitely riskier than govt operations the loan giver seeks additional compensation as part of the fixed payment. Thus any Fixed return security is the broad classification for Debt.

    Equity – Represents ownership in an organization. Owners will participate in profits and losses.

    Asset allocation is a powerful tool for wealth creation and I am glad there is yet another Jago Investor walking there. [Folks still doubting Asset allocation check http://wp.me/p1Y418-24%5D.

    I assume you don’t hold MIPs/Balanced MF as these funds predominantly invest in Debt securities as well. Your EPF contributions are Debt contributions. So are your PPF contributions. Take them into consideration as well.

    As much as you want to implement an Asset allocation plan this should not be done in a whim by selling equity assets and moving them into debt immediately. You have built a Equity tilted portfolio over many years. So spend about 6-12 months at least to get to your targeted 80-20 allocation.
    I would recommend doing a STP from the poorest performing Mutual fund schemes in your portfolio to Short term debt funds. Even in ST debt funds use the dividend option to make it tax efficient. The reason I am hunting down the poorest funds is that it can ‘mostly’ be safely assumed such schemes will continue to underperform in the near future while your growing assets can still keep growing.

    Increase your PPF contributions and going by your capacity to invest up to 20k per month I believe you should be able to invest upto 1 Lac in PPF each year. PPF and EPF + ST Debt funds alone can easily make up one’s Debt portfolio. You can also consider any long term tax free bonds as well in your folio. Stay away from Bank FDs (even at the current 10+% available in few places) as they are tax inefficient.

    Assuming you can invest 20k per month you can invest up to 240k in the next 12 months and your EPF is about 30k per year you total asset value in 12 months = 8 Lacs+2.4 Lacs+ 30k = 10.7 Lacs.

    20% of this will be 214,000. Assuming the 35k of FDs are not maturing soon you would need about 1.8 lacs of fresh investment in Debt this year (next 12 months, I mean) to meet your allocation.

    I would recommend this:
    Maximize PPF = 100,000
    We have already assumed EPF = 30,000 per year
    So for the balance 50,000 STP approx Rs. 4000 EACH MONTH from the worst performing schemes in your folio [Kill the losers, let your winners survive].
    Again 20 companies for 2 lacs in Direct stocks in a bad game. Have 3 or 4 companies max for direct investing (for 2 lacs) only if you think you have the acumen to select and monitor the companies. Else you may be better off with MFs.

    Year end targeted portfolio:

    Equity
    Stocks: 2 lacs
    MFs: 6.52 Lacs

    Debt:
    FD: 35000
    PPF: 100,000
    EPF: 30,000
    Short term funds/Long term tax free bonds: 50,000

    This will result in a 80-20 allocation between Equity and Debt.

    At the outset if your EPF value is already around 2 Lacs – considering you have been working for sometime – you are already at the targeted 80-20 allocation. Even in that case I would recommend you max out the PPF contributions of 100,000 each year.

    1. rmohan80@gmail.com says:

      Hi Justgrowmymoney,

      Thank you for taking the time out for the lengthy and informative post. I would like to say that I don’t have EPF nor do I have any PF savings. So whatever i’ve posted is what I totally have. The FDs are maturing next month, so again my debt portfolio is back to 0 πŸ™‚

      But very valid suggestion on how to to get my portfolio to a 80:20 ratio without just selling some equity. Valid suggestion on # of stocks to keep too

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