Make Financial Planning Your Mantra In 2014

The year 2013 has been a roller coaster ride for investors. While on one hand, an asset class like gold that was much favoured at the beginning of the year disappointed with negative returns, on the other, a neglected asset class like equity did quite well. The debt market turned out to be a mixed bag.

Although at the start of the year there was a bullish undertone to the debt market on expectations of an impending rate cut by the RBI, during the year it had to confront a number of issues that affected investors differently. For example, all those investors who invested in duration and dynamic bond funds had to face rough weather after the RBI stepped in to stem the INR fall. However, the changed scenario also provided an opportunity to lock in money at higher yields in options like FMPs and tax-free bonds for varying periods and in a tax-efficient manner.

There is a lesson here for investors who make investment decisions based on the current mood of the market. In situations like these, since the focus is on short-term performance, other important factors such as asset allocation, time horizon, investors’ personal risk profile and the risks associated with various investment options are often ignored. As a result, investors end up building either an overly aggressive portfolio or a rather conservative one. Needless to say, this often jeopardises their financial future.

If you haven’t been following the right investment process so far, you can make amends in 2014. To do so, you must follow a process of financial planning. This would involve listing out your goals, assigning a time horizon and target to each of them and then deciding an appropriate asset mix to achieve them. Investing as per your asset allocation and maintaining this through your time horizon will ensure that your portfolio doesn’t take you beyond your risk-taking capacity and that there are no shortfalls at the end of the designated period. It will also help you to avoid making haphazard investment decisions.

While investing in line with one’s asset allocation is important, it may be worthwhile to realign the portfolio within each asset class once a year. For example, by changing allocations to different segments of the equity market like Small-, Mid- and Large-Cap, one can benefit both in terms of maintaining the right balance risk and reward as well as getting better returns. The beginning the year can be the right time for this exercise. So, analyse your portfolio and don’t hesitate to make changes in it, if required. Here are a few pointers to help you along this process.

The year 2014 is likely to be a good one for the equity markets. The macro-economic environment is expected to improve and growth is likely to accelerate going forward. Of course, the outcome of the general elections is likely to play a major role in stability as well as the level of performance of the markets and removal of uncertainty. The rupee is likely to remain range-bound. Besides, equity as an asset class is under-owned. All these factors should contribute to the equity market’s good show in 2014. Your portfolio should have a bias toward Large-Cap stocks/funds, with an exposure of 60 per cent or more. Of the remaining 40 per cent, a major part can be allocated to Mid-Cap funds. Since stock picking is crucial specifically for the Small- and Mid-Cap segments, investors need to select funds that have a consistent performance track record.

On the debt side, although the risk of negative impact on the debt markets due to the US Fed’s tapering programme remains, a strong current account and healthy reserves may not prompt any rate action by the RBI. Broadly, the interest rates are likely to remain stable. Therefore, income funds following an accrual strategy and short-term income funds would be ideal for a time horizon of 12-18 months. FMPs remain a good bet at the current levels for those who may prefer to get stable returns and double indexation benefit.

While incremental savings in 2014 can be deployed differently from what was planned initially, allocating incremental savings for existing goals ensures that there is no shortfall even if one has to weather some bad years in the process. Moreover, it will help in rebalancing your existing portfolio.

Hemant Rustagi
CEO, Wiseinvest Advisors