Posts Tagged ‘asset allocation’

PORTFOLIO REBALANCING TO STAY ON TRACK

Portfolio re balancing is the process of bringing the different asset classes back into appropriate proportion following a significant change in one or more.
PORTFOLIO REBALANCING TO STAY ON TRACK
Over the time, as different asset classes produce different returns, the portfolio’s asset allocation changes. To recapture the portfolio’s original risk and return characteristics, the portfolio must be rebalanced to its original asset allocation.

The primary purpose of rebalancing is to maintain a consistent risk profile. Periodic rebalancing will help to avoid counterproductive temptations in the market.

For example, in this seemingly falling market, rather than an investor

Tempted to follow the crowd, who are busy dumping popular stocks; the imbalance created by erosion of the equity component can be used to book profits on debt portion and buy into equities to bring back the allocation to the original ratio.

The balancing act

To get the entire asset classes back to their original allocation percentages would entail the following:

·Selling part of the equities and investing the proceeds into debt and cash and vis-a-versa.

·Putting in fresh one-time investments into debt and cash to raise the allocation in the portfolio.

·Start a systematic investment plan skewed towards debt and cash.

Rebalancing controls risk

The investments in a portfolio will perform according to the market. As time goes on, a portfolio’s current asset allocation can move away from an investor’s original target asset allocation.

If left un-adjusted, the portfolio could either become too risky, or too conservative.

The goal of rebalancing is to move the current asset allocation back in line to the originally planned asset allocation.

How often should one rebalance?

Though the frequency is entirely dependent on the investor, the portfolio size as well as market conditions will impact the overall returns’ expectation of the portfolio.

The main idea is that the periodic interval between successive rebalancing acts should be constant.

Some of the other factors affecting the rebalancing are:

Cost of transactions

If one decides to rebalance the portfolio once in six months, he needs to factor in short term capital gains, brokerages and entry exit loads. Hence, it is advisable to rebalance annually the long term portfolios and rebalance semi annually for the short term portfolios.

Volatility

High return volatility increases the fluctuation of the asset class weights around the target allocation and increases the risk of significant deviation from the target.

Greater volatility implies a greater need to rebalance. In the presence of time-varying volatility, rebalancing occurs more often when volatility rises.

Investors can also employ another trigger for asset rebalancing. They can decide to rebalance their portfolio, not according to time, but rather only when any asset class changes in allocation due to market movements, over a certain percentage.

Conclusion

Portfolio rebalancing is an important part of sticking to your game plan. You should look at your portfolio at least quarterly in terms of rebalancing and more frequently if you have had a significant gain or loss in any asset class.

At last asset rebalancing is a very important exercise for any disciplined investor who wishes to approach their investing in a systematic manner, while realizing their financial goals that they have set out to achieve.

Portfolio rebalancing is the process of bringing the different asset classes back into appropriate proportion following a significant change in one or more. Over the time, as different asset classes produce different returns, the portfolio’s asset allocation changes.

To recapture the portfolio’s original risk and return characteristics, the portfolio must be rebalanced to its original asset allocation.

The primary purpose of rebalancing is to maintain a consistent risk profile. Periodic rebalancing will help to avoid counterproductive temptations in the market. For example, in this seemingly falling market, rather than an investor tempted to follow the crowd, who are busy dumping popular stocks, the imbalance created by erosion of the equity component can be used to book profits on debt portion and buy into equities to bring back the allocation to the original ratio.

Bear and Bull Part 2

Hello Friends,

Just an extension of our previous blog ” Bear and Bull Part 1″.

Both bull and bear markets are inevitable

Both bull and bear markets are inevitable

In this Blog we would touch upon if bull and bear markets are inevitable and what are the basics investors should keep in mind while trading in bear and bull market 🙂

Both bull and bear markets are inevitable!

Smart investors try to anticipate both events to profit from their eventuality.

Bear markets are generally shorter in duration than bull markets.

To avoid being hurt by bear markets you must recognize the signs early and move part of your assets into cash equivalent investments.

It is recommendable that one should invest for the long term. Don’t let the bears get you down!

The same thing is true of bears – don’t panic and sell low.

Let the bear market run its course, which history tells us is likely to be short.

On the other hand, a bull market can leave many investors feeling pretty good about their ability to prosper.

Their confidence bolstered by the good times.

Some even find themselves swept up in “Bull Market Myopia” and forget the basic tenets of smart investing, like asset allocation and portfolio diversification.

Holding good stocks through bull and bear markets is a prudent strategy.

🙂

However, many investors feel that they do not want to be in the market during a bear market. It is difficult to predict when to move in and out of the market.

When a bear market ends, a strong upward move can occur in a short time.

If you are not in the market you will miss the move. The probability that your timing will be wrong is very high.

Unlike slow-starting bull markets, bear markets may start with a mini-crash – a major drop within a few days when investors least expect it.

Many investors are afraid to get out of a bull market for fear of missing “big profits” at the top of the market.

This is a recipe for disaster!

It is also known as greed!

As a bull market continues to increase, investors should start to decrease their stock holdings and move them into cash or money markets accounts.

Now, besides bulls and bears there are two other animals in our zoo to keep watch for!

Ostriches:

Are investors who stick to their old strategies, oblivious to changes in the world around them.

And then there are the Hogs.

Bulls can make money. Bears can make money.

But Hogs are investors who are too greedy and usually get slaughtered!

🙂

Note : For More Finance Gyan, Latest Industry, Stock Market, Economy News and Updates, please click here..

Investor’s Dilemma : Are ULIPs just another Mutual Fund??

ulips

At almost every investor mind a question is generally cropped up: “What is the difference between a ULIP and a Mutual Fund?”

🙂

The reason, perhaps for the wide extent of confusion, lies largely in the way ULIPs have been sold by agents. As just another mutual fund.

🙂

Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning.

🙂

As is the case with mutual funds, investors in ULIPs is allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis.

🙂

Similarly ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few.

🙂

Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance component.

🙂

Mutual Fund is a body corporate that pools the money from individual/corporate investors and invests the same on behalf of the investors /unit holders, in various investment avenues like equity shares, Government securities, Bonds, Call money markets etc., as per the pre-specified objective and distributes the profits earned from such investment.

🙂

In India, Mutual Funds are registered with the Securities and Exchange Board of India (SEBI).


ULIPs vs Mutual Funds

🙂

ULIPs are a mix of investment and insurance. 🙂

But very long term investment, not even medium term.

Insurance companies themselves admit, that if your investment horizon is anything less than 7 years, don’t even consider a ULIP.

🙂

Charge structure in a ULIP is vastly different from a mutual fund.

🙂

ULIP investors also have the flexibility to alter the premium amounts during the policy’s tenure.

The freedom to modify premium payments at one’s convenience clearly gives ULIP investors an edge over their mutual fund counterparts.

😉

In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, administration among others are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board of India.

🙂

Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority.

🙂

ULIPs also allow you to switch from debt to equity within the same scheme, at no extra charge.

So if you want to get the benefits of long term investment and risk cover in one single product, ULIP is the product for you.

🙂

So it is not an issue, of whether a mutual fund is better or a ULIP. It is about your need.

Both can co-exist in your basket of needs. 🙂

So identify your needs with a financial planner and then pick the product suitable for you.

🙂

ULIPs are a mix of investment and insurance. But very long term investment, not even medium term.

Insurance companies themselves admit, that if your investment horizon is anything less than 7 years, don’t even consider a ULIP.

Charge structure in a ULIP is vastly different from a mutual fund.

ULIP investors also have the flexibility to alter the premium amounts during the policy’s tenure.

The freedom to modify premium payments at one’s convenience clearly gives ULIP investors an edge over their mutual fund counterparts.

In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, administration among others are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board of India. Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority.

ULIPs also allow you to switch from debt to equity within the same scheme, at no extra charge. So if you want to get the benefits of long term investment and risk cover in one single product, ULIP is the product for you.

So it is not an issue, of whether a mutual fund is better or a ULIP. It is about your need.

Both can co-exist in your basket of needs.

So identify your needs with a financial planner and then pick the product suitable for you.

What are ULIPs? How is it different from Mutual funds ?

ULIPs are a mix of investment and insurance

ULIPs are a mix of investment and insurance

At almost every investor mind a question is generally cropped up: “What is the difference between a ULIP and a Mutual Fund?”

The reason, perhaps for the wide extent of confusion, lies largely in the way ULIPs have been sold by agents. As just another mutual fund.

Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning.

As is the case with mutual funds, investors in ULIPs is allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis.

Similarly ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few.

Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance component.

And as you would be aware about Mutual Fund, it is a body corporate that pools the money from individual/corporate investors and invests the same on behalf of the investors /unit holders, in various investment avenues like equity shares, Government securities, Bonds, Call money markets etc., as per the pre-specified objective and distributes the profits earned from such investment.

In India, Mutual Funds are registered with the Securities and Exchange Board of India (SEBI).

ULIPs vs Mutual Funds

ULIPs

Mutual Funds

Investment amounts

Determined by the investor and can be modified as well

Minimum investment amounts are determined by the fund house

Expenses

No upper limits, expenses determined by the insurance company

Upper limits for expenses chargeable to investors have been set by the regulator

Portfolio disclosure

Not mandatory*

Quarterly disclosures are mandatory

Modifying asset allocation

Generally permitted for free or at a nominal cost

Entry/exit loads have to be borne by the investor

Tax benefits

Section 80C benefits are available on all ULIP investments

Section 80C benefits are available only on investments in tax-saving funds

ULIPs are a mix of investment and insurance. But very long term investment, not even medium term.Insurance companies themselves admit, that if your investment horizon is anything less than 7 years, don’t even consider a ULIP.

Charge structure in a ULIP is vastly different from a mutual fund.

ULIPs invest for the long term, as they expect investors to stay for the long term. And the purpose of a ULIP is also different build assets through a pension plan, retirement plan or child plan. All of which, need very long term investing, say 10-15 years or even more.

ULIP investors also have the flexibility to alter the premium amounts during the policy’s tenure.

For example an individual with access to surplus funds can enhance the contribution thereby ensuring that his surplus funds are gainfully invested; conversely an individual faced with a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP).

The freedom to modify premium payments at one’s convenience clearly gives ULIP investors an edge over their mutual fund counterparts.

In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, administration among others are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board of India. Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority.

Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis, albeit most fund houses do so on a monthly basis. Investors get the opportunity to see where their monies are being invested and how they have been managed by studying the portfolio.

*There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some insurers claim that disclosing portfolios on a quarterly basis is mandatory, others state that there is no legal obligation to do so.

ULIPs also allow you to switch from debt to equity within the same scheme, at no extra charge. So if you want to get the benefits of long term investment and risk cover in one single product, ULIP is the product for you.

So it is not an issue, of whether a mutual fund is better or a ULIP. It is about your need.

Both can co-exist in your basket of needs.

So identify your needs with a financial planner and then pick the product suitable for you.