What is your advice for rebalancing asset allocation in the situation below?

In a Rs 1.1 crore portfolio, I have 87 percent equity (Rs 97 lakhs, mostly MFs) and 13 per cent (Rs 15 lakhs) debt. I want to bring it to 60 per cent equity and 40 per cent debt. I have identified six mutual funds which currently have Rs 35 lakhs long term profit.

Selling equity MFs for profit booking at one go has tax implications and may not be the right strategy. But if I can move this Rs 35 lakhs profit to debt funds, it will help to balance my asset allocation.

What is the most tax efficient and sensible way to do the rebalancing?

I am making future investments in SIP mode in conservative funds such as Mirae Asset Hybrid Equity. I have a 10 year investment horizon.

Ans: Please continue with the SIPs, there are too many funds; try to restrict to 4 to 6 funds as they provide adequate diversification, post that portfolio gets over diversified.

Ans: Excellent portfolio and thought process, no rebalancing required please continue.

Ans: First, I must say you’ve done a commendable job with your investments. At the age of 41-43, you and your wife have built a robust portfolio, valued at Rs 2 crore in stocks, Rs 50 lakh in mutual funds, and Rs 2 crore in fixed deposits (FD), Public Provident Fund (PPF), Government Securities (G-sec), National Savings Certificate (NSC), and Non-Convertible Debentures (NCD). Owning your house outright and having no loans or debt puts you in an excellent financial position.

With plans to retire in the next five years, it’s crucial to reassess and rebalance your portfolio to ensure you achieve your retirement goals. Let’s dive into how we can strategically rebalance your portfolio for a secure and comfortable retirement.

Reviewing Your Investment Goals

Your primary goal is to retire in the next five years. This means we need to focus on capital preservation, income generation, and moderate growth to outpace inflation. Your current portfolio shows a good mix of equities and debt instruments, which is a strong start.

Evaluating Current Portfolio Allocation

1. Stock Investments (Rs 2 crore)

Stocks are high-risk but high-reward investments. With Rs 2 crore in stocks, you have a substantial equity exposure. Equities are excellent for growth but can be volatile, especially as you approach retirement.

2. Mutual Funds (Rs 50 lakh)

Your mutual funds are likely a mix of equity and debt funds. They provide diversification and are actively managed, which is beneficial. Actively managed funds can potentially offer higher returns compared to index funds, as fund managers can make strategic decisions.

3. Fixed Deposits (FD), PPF, G-sec, NSC, NCD (Rs 2 crore)

These instruments offer stability and security. They are low-risk and provide regular income, which is essential for a retirement portfolio.

Strategic Portfolio Rebalancing

1. Reducing Equity Exposure

Given your proximity to retirement, it's wise to gradually reduce your equity exposure. Equities are volatile, and a market downturn just before or during retirement can significantly impact your portfolio. Aim to reduce your stock investments to around 40-50% of your total portfolio.

Action Plan:

Gradually sell off a portion of your stock investments.
Reinvest the proceeds into less volatile, income-generating assets.
2. Increasing Fixed Income Investments

Increasing your allocation to fixed income instruments will provide stability and regular income. Focus on instruments like debt mutual funds, corporate bonds, and more Government Securities (G-secs).

Action Plan:

Increase investments in debt mutual funds which are actively managed for better returns.
Allocate more towards corporate bonds and G-secs for steady income.
3. Balancing Mutual Funds

Your mutual funds should have a mix of equity and debt. Shift a portion of your equity mutual funds into balanced or hybrid funds that invest in both equities and debt. This provides growth potential while reducing risk.

Action Plan:

Evaluate your current mutual funds with a Certified Financial Planner (CFP).
Shift some equity mutual funds to balanced or hybrid funds.
4. Building an Emergency Fund

Ensure you have an emergency fund equivalent to 6-12 months of living expenses. This fund should be easily accessible and invested in highly liquid, low-risk instruments like a savings account or liquid mutual funds.

Action Plan:

Set aside funds for emergencies in a savings account or liquid mutual funds.
5. Planning for Regular Income

In retirement, you’ll need a steady income stream. Consider investing in Senior Citizens Savings Scheme (SCSS), Post Office Monthly Income Scheme (POMIS), or systematic withdrawal plans (SWPs) from mutual funds. These provide regular income and are relatively low-risk.

Action Plan:

Invest in SCSS and POMIS for secure, regular income.
Set up SWPs from mutual funds for additional income.
Tax Efficiency and Planning

1. Tax-Efficient Investments

Ensure your investments are tax-efficient. Utilize the benefits of instruments like PPF and NPS, which offer tax exemptions. Tax planning is crucial to maximize your post-tax returns, especially during retirement when your income sources change.

Action Plan:

Maximize contributions to PPF and NPS for tax benefits.
Consult with your CFP to optimize your investment portfolio for tax efficiency.
2. Reviewing Insurance Policies

While you did not mention any insurance policies, it's essential to review any existing policies. Ensure you have adequate health insurance and, if necessary, a small life insurance policy to cover any liabilities or to provide for dependents.

Action Plan:

Review and ensure adequate health insurance coverage.
Consider a life insurance policy if needed for dependents.
Regular Financial Reviews

Your financial situation and market conditions will change over time. Regular reviews of your portfolio are crucial to stay on track. Work with your CFP to review your portfolio at least annually. Adjust your investments based on performance, market conditions, and changes in your financial goals.

Action Plan:

Schedule annual reviews with your CFP.
Adjust your portfolio based on professional advice and changing circumstances.
Retirement Lifestyle Planning

Think about your lifestyle post-retirement. Your expenses might change, and it’s essential to plan accordingly. Consider potential travel, hobbies, healthcare costs, and any other significant expenses.

Action Plan:

Estimate your post-retirement expenses with your CFP.
Ensure your investment strategy aligns with your lifestyle goals.
Final Insights

Your current financial position is strong, and with careful planning and strategic rebalancing, achieving a secure and comfortable retirement in the next five years is within reach. Reducing equity exposure, increasing fixed income investments, and ensuring regular income streams are crucial steps. Regular reviews and tax-efficient planning will further bolster your financial health.

Congratulations on building such a solid foundation, and best of luck in your journey towards a well-planned and prosperous retirement!

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Hi Umesh, it’s great that your mutual fund investment has grown from Rs. 22,00,000 to Rs. 32,50,000. This shows that you’ve made some good choices. With this growth, it’s important to reassess your portfolio and consider if rebalancing is necessary.

Why Rebalancing is Important

Rebalancing ensures that your investments stay aligned with your financial goals and risk tolerance. Over time, some funds may perform better than others. This can change the risk profile of your portfolio. For example, if equity funds grow faster, your portfolio might become more equity-heavy. This means more risk, especially if the market turns volatile.

Rebalancing helps in maintaining your desired asset allocation.

Assessing Your Current Asset Allocation

Start by reviewing the current allocation between equity, debt, and other asset classes in your portfolio. Compare this with your original investment strategy. Has the equity portion increased? Has the debt portion reduced? If yes, then your portfolio might have become riskier than you initially planned.

It’s essential to match your investment mix with your risk tolerance.

Steps to Rebalance Your Portfolio

If you find that your asset allocation has shifted, you can follow these steps to rebalance:

Evaluate Your Financial Goals: First, revisit your financial goals. Are they short-term, medium-term, or long-term? Ensure that your current portfolio aligns with these goals.

Determine the Desired Asset Allocation: Based on your goals, decide the ideal mix of equity and debt. For example, if you have a long-term horizon, you might want to keep a higher percentage in equity. If you are closer to your goal, you might want to shift more towards debt.

Sell Overweight Assets: If equity has grown more than debt, consider selling some equity funds. This helps in reducing the risk.

Invest in Underweight Assets: If your debt allocation is lower than desired, reinvest the proceeds into debt funds. This helps in stabilising your portfolio.

Frequency of Rebalancing

Rebalancing is not something you need to do frequently. Typically, it’s advisable to review and rebalance your portfolio once a year. However, if there are significant market movements, you might want to consider doing it sooner.

Remember, rebalancing too often can lead to unnecessary transaction costs and taxes.

Tax Implications of Rebalancing

When you sell mutual funds to rebalance, be aware of the tax implications. Equity funds held for less than one year attract short-term capital gains tax at 15%. If held for more than one year, long-term capital gains above Rs. 1 lakh are taxed at 10%. For debt funds, short-term capital gains are added to your income and taxed at your applicable slab rate. Long-term capital gains are taxed at 20% with indexation.

Rebalancing should be done with a focus on minimising tax liability.

The Importance of Professional Guidance

It’s commendable that you are thinking about rebalancing. However, the process can be complex. Consulting a certified financial planner (CFP) can be beneficial. They can provide a detailed analysis of your portfolio and suggest the best course of action. A CFP will ensure that your portfolio remains aligned with your financial goals and risk tolerance.

Professional advice adds value by tailoring strategies to your specific needs.

Disadvantages of Direct Funds

If you are investing in direct mutual funds, you may save on the expense ratio. However, direct funds require you to make decisions on your own. This can be challenging if you lack the expertise. A certified financial planner can guide you with regular funds, ensuring that your investments are well-managed and aligned with your goals.

Regular funds through a CFP offer ongoing advice and support.

Why Actively Managed Funds Are Better

Index funds and ETFs might seem attractive due to lower costs. However, they only track the market and do not aim to outperform it. In contrast, actively managed funds have the potential to generate higher returns, especially in a dynamic market. Fund managers make decisions based on market conditions, which can lead to better outcomes.

Actively managed funds offer flexibility and the potential for higher returns.

Finally

Rebalancing is an essential part of maintaining a healthy investment portfolio. Given the significant growth in your mutual fund investments, it might be the right time to rebalance. Assess your current asset allocation, align it with your financial goals, and take the necessary steps. Consulting a certified financial planner can ensure that your decisions are sound and beneficial in the long run.

Investing wisely is not just about returns; it’s about achieving your financial goals with confidence.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: You are 41 years old, earning Rs 2.5 lakh post-tax, with an additional Rs 40,000 monthly interest from FDs. Your assets include Rs 80 lakh in FDs, Rs 23 lakh in mutual funds, Rs 32 lakh in PF, and Rs 13 lakh in PPF. You also have two flats valued at Rs 50 lakh and Rs 90 lakh. Additionally, you contribute Rs 1 lakh per month to an RD and Rs 75,000 per month to SIPs. With a son entering college in five years and a desire to retire at 51, now is the right time to reassess and rebalance your portfolio.

Assessing Your Asset Allocation
Fixed Deposits (FDs): You have Rs 80 lakh in FDs, providing Rs 40,000 per month in interest. FDs are safe, but returns are low compared to inflation. Consider reducing the FD portion as you approach retirement.

Mutual Funds: Rs 23 lakh is invested in mutual funds, which is a good step towards growth. However, ensure these funds are diversified across different asset classes. Review their performance regularly.

Provident Fund (PF) and Public Provident Fund (PPF): With Rs 32 lakh in PF and Rs 13 lakh in PPF, these are long-term, safe investments. They offer tax benefits and steady returns. Continue contributing to PPF, but assess whether additional contributions to PF are necessary.

Recurring Deposit (RD): You are investing Rs 1 lakh monthly in RD. While RDs provide safety, they offer lower returns compared to mutual funds. Consider reallocating some of this towards more growth-oriented investments.

Real Estate: You own two flats worth Rs 50 lakh and Rs 90 lakh, respectively. Real estate offers capital appreciation and rental income. However, it’s illiquid and involves maintenance costs. Evaluate if these properties align with your retirement goals.

Rebalancing Your Portfolio for Retirement
Equity vs. Debt Allocation: At 41, with a retirement goal at 51, it's crucial to balance equity and debt. Consider a 60:40 equity-to-debt ratio. Equity provides growth, while debt ensures stability.

Increase Equity Exposure: Your current SIPs of Rs 75,000 per month should be diversified into different equity mutual funds. Focus on large-cap, mid-cap, and flexi-cap funds to capture growth while managing risk.

Gradual Shift to Debt: As you approach retirement, gradually shift from equity to debt. This will protect your corpus from market volatility. Start increasing your debt exposure five years before retirement.

Review Mutual Fund Selection: Ensure your mutual fund portfolio includes a mix of growth and value funds. Regularly review the performance and make necessary adjustments. Avoid index funds, as actively managed funds have the potential to outperform.

Reduce FD Dependency: FDs are safe but offer lower returns. Consider moving some FD funds to debt mutual funds or balanced funds, which offer better returns with moderate risk.

PPF and PF Contributions: Continue contributing to PPF for tax-free, safe returns. Assess whether additional PF contributions align with your overall portfolio strategy.

Planning for Your Son’s Education
Education Corpus: With your son entering college in five years, start building an education corpus. Allocate a portion of your SIPs towards education-specific mutual funds or balanced funds.

Systematic Withdrawal Plan (SWP): Consider an SWP from your mutual funds to cover education expenses. This will provide a regular income stream without depleting your entire investment.

Retirement Corpus Planning
Estimate Retirement Expenses: With current monthly expenses of Rs 50,000, factor in inflation to estimate future expenses. Your retirement corpus should be sufficient to cover these expenses for at least 25-30 years.

Diversified Income Streams: Post-retirement, aim to have diversified income streams. This could include rental income, SWPs from mutual funds, and interest from debt investments.

Avoid Annuities: Annuities may offer regular income but often have low returns. Instead, consider SWPs or dividend income from mutual funds.

Health and Life Insurance
Health Insurance: Ensure you have adequate health insurance coverage. Medical expenses rise with age, and a comprehensive policy will protect your retirement savings.

Life Insurance: At this stage, life insurance should be focused on covering any remaining liabilities. If your son becomes financially independent, the need for life insurance may decrease.

Estate Planning
Will and Nominees: Ensure you have a will in place. Clearly assign nominees for your investments, bank accounts, and properties. This will ensure a smooth transfer of assets to your heirs.

Power of Attorney: Consider assigning a power of attorney to manage your financial affairs if you are unable to do so.

Finally
At 41, you are in a strong position with diversified assets and steady income. To retire comfortably at 51, focus on rebalancing your portfolio towards a mix of growth and stability. Increase equity exposure now, with a gradual shift to debt as you near retirement. Plan for your son’s education and ensure you have adequate insurance coverage. With careful planning and regular reviews, you can achieve a secure and comfortable retirement.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in