The bulk of an investor's portfolio should be in shorter-duration funds of up to one year portfolio duration.
The start of a new year is a good time to assess and recalibrate your financial strategy. Here are a few critical steps you need to take to align your portfolio with evolving market conditions and changes in your life circumstances.
Equities
Equity markets have witnessed a sharp run-up over the past year, with the Nifty 50 up 22.6 per cent. This would have made many investors' portfolios overweight on equities.
They should move a part of their portfolio from equities to fixed income to bring their asset allocation back to the original level.
Investors also need to rebalance at the sub-category level. Mid- and small-cap indexes have run up more than the large-cap index.
While the Nifty Midcap 150 index is up 48.4 per cent, the Nifty Small-cap index is up 54.7 per cent over the past year.
Therefore, investors should sell a part of their small- and mid-cap holdings and move the money to the large-cap category.
Purchasing active funds within the large-cap category is not advisable.
Says Feroze Azeez, deputy chief executive officer, Anand Rathi Wealth: "This category has the least alpha generation potential.
"In 2023, 84 per cent of large-cap funds beat the Nifty 50, which is less compared to the other diversified equity categories." One may opt for passive funds within this category.
Next, check the style diversity within your equity portfolio.
Says Azeez: "The performance of the two styles -- growth and value -- is usually inversely related."
It is prudent to allocate to both styles instead of being influenced by past performance and tilting heavily towards one over the other.
Fixed income
The Reserve Bank of India is expected to start cutting the repo rate in the latter half of 2024.
Says Ajinkya Kulkarni, co-founder and CEO, Wint Wealth: "Once the rate cuts start, all the banks and non-banking financial companies (NBFCs) will cut the rates on their fixed-income instruments."
According to him, now is the best time to lock your money into high-return fixed deposits (FDs).
Some allocation may be made to FDs of small finance banks (SFBs).
Says Kulkarni: "SFBs offer approximately one to two percentage points extra interest per annum compared to most established banks. They also come under the Deposit Insurance and Credit Guarantee Corporation's deposit insurance of Rs 5 lakh per account per account holder."
He suggests avoiding floating-rate FDs at this juncture.
Investors should also have an allocation to debt mutual funds.
Says Jigar Patel, member, Association of Registered Investment Advisors: "While bank FDs will only give the stated interest rate, debt MFs can also offer capital gains in a declining interest-rate scenario."
He advises investors to avoid taking credit risk and stick to funds that invest in sovereign or AAA-rated bonds.
The bulk of an investor's portfolio should be in shorter-duration funds of up to one year portfolio duration.
Some allocation may be made to long-duration funds or dynamic bond funds for possible capital gains. Try to match your investment horizon with the portfolio duration of the fund category you invest in.
Gold
Gold exchange-traded funds, which reflect the performance of the yellow metal, have given a return of around 9 per cent over the past year.
Investors should maintain a 10 to 15 per cent allocation to this commodity as a hedge against equity market volatility.
Insurance: Life and health
Most people in India do not have adequate life cover, as numerous surveys have highlighted.
Says Mrin Agarwal, founder and director, Finsafe India: "While people have a few endowment plans and unit-linked insurance plans (ULIPs), and some health cover, the sum insured is usually inadequate.
"Individuals need to assess the cover they require and acquire it."
As for how much coverage one should buy, M Barve, director, MB Wealth Financial Solutions, says: "Buy a life cover of 15 times your annual income if you are aged 35 to 40. Beyond 40 years, a cover of 10 to 12 times your income is good enough."
People whose life circumstances have changed need to reassess their coverage. Those who have gotten married, had a child, or taken a home loan should increase their coverage by purchasing an additional term plan.
Having an adequate sum insured on the health insurance policy is equally important.
Says Agarwal: "Individuals with dependants should have health cover worth at least Rs 10 to 15 lakh."
She adds that one should not go for the cheapest cover as it may have many exclusions and sub-limits.
Tax
It would be prudent to book profits in equities after the run-up over the past year.
Says Naveen Wadhwa, deputy general manager, Taxmann: "Investors who are contemplating profit booking should try to convert their short-term capital gains to long-term."
This is pivotal due to the different tax rates.
Long-term capital gains from equity shares held for over 12 months are taxed at 10 per cent if they exceed Rs 1 lakh in a financial year, while short-term gains incur a 15 per cent tax without any threshold.
Says Wadhwa: "Check the date of purchase before selling shares, as long-term capital gains will help you reduce the tax burden.
"You will also qualify for exemption under Section 54F, provided the consideration is invested in purchasing or constructing a house property."
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
'I've Rs 5 lakh to invest. Buy MFs Or...
Looking To Invest Money For Short Term? Read This
Reconsider Your Investment Strategy
Stocks Or MFs? Where Can YOU Invest?
'The Best SIP For Long Term Investment?'