Tracking
Let us assume that you have a portfolio according to your AAP. You are sailing smoothly towards your goals. Do you think it is auto pilot henceforth? Can you forget words like diversification biversification and calculation of risk return ratio (whatever that means) and go back the real world? No, sadly not.
Let us assume your New Year resolution is to shed a few kilos weight. To achieve this goal, you walk one hour everyday. You would weigh yourself once in a while to check if you are actually losing weight. If not, you would consider taking up other form of exercise to reduce weight. Similarly, tracking helps assess your portfolio's performance as no investment is forever. The best way to track is to have the complete portfolio online and check it periodically. This is usually done once in a month. When you track your portfolio, you are looking for any significant changes in investments.
Just as you do not lose few kilos by simply looking at your weight, you do not have to check the portfolio everyday. Checking it too often usually leads to anxiety. You feel happy if the portfolio has gone up that day and feel sad if it goes down. This does not augur well for the overall long-term plan. Hence it's enough if the portfolio is checked once in a fortnight or month.
Rebalancing
Let us assume that you want an optimum weight 'X' Kilos. You need to put on weight if you are underweight(less then x) or lose weight if you are overweight (more then x). Rebalancing is an ongoing course correction.
The markets move up or down. Reasons are attributed after they go up or down and never before. Hence we need to correct our course of action if we are moving away from our AAP. Let us assume that we have an AAP for Rs one lakh which is 40% equities and 60% debt and invested as below in column titled now. A year later lets assume that the portfolio has changed as below in column titled 1 year later.
AAP : Rs1,00,000 |
|
|
|
| Mutual Fund | Now (in Rs.) | 1 year later (in Rs.) | Weightatge |
|---|---|---|---|
| Equity Mutual Funds | 40,000 | 46,000 | 46% |
| Debt Mutual Funds | 40,000 | 38,500 | 38.5% |
| FD | 20,000 | 22,000 | 22% |
| Total | 1,06,500 | 106.5% |
Thus the total portfolio is worth Rs. 1, 06,500. Which means that the portfolio has increased by 6500 and we need to rebalance the same according to our AAP.
On the other hand, if we had allocated as per original plan i.e. 40% equity and 60% debt (split into 40% debt funds and 20% bank FD), and then the new portfolio would look as follows:
| AAP :Rs. 1,06,500 | Amount (in Rs.) | Allocation |
|---|---|---|
Equity Mutual Funds |
42,600 | 40% |
Debt Mutual Funds |
42,600> | 40% |
Fixed Deposit |
21,300> | 20% |
Total |
1,06,500 | 100% |
We can check and rebalance our portfolio once in a year or if there is a rapid rise (as in 2007) or a downfall (as in 2009). You would have sold shares at the end of 2007 as your equity portion would have risen significantly and bought debt funds. At the end of 2009, you would have bought equity funds as their prices would have fallen and sold debt.
Following tables highlights what would have happened if you had followed this path.
Returns from 01.12.2006 - 01.12.2007
AAP: Rs. 1, 00,000
| Investment Made In | 01-12-2006 (In Rs.) | 01- 12-– 2007 (In Rs.) | Return |
|---|---|---|---|
Equity Mutual Funds |
40,000 | 56,000 | 40% |
Debt Mutual Funds |
40,000 | 42,400 | 6% |
Fixed Deposit |
20,000 | 21,500 | 8% |
| Total | 1,19,900 | 19.90% |
Rebalanced Portfolio on 02.12.2007
AAP: Rs: 1, 19,900
| Investment Made In | Amount (In Rs.) | Allocation |
|---|---|---|
Equity Mutual Funds |
47,960 | 40% |
Debt Mutual Funds |
47,960 | 40% |
Fixed Deposit |
23,980 | 20% |
| Total | 1,19,900 | 100% |
Rebalanced Portfolio Performance on 02.12.2009
AAP: Rs. 1, 19,900
| Investment Made In | Now (In Rs.) | 1 yr later (In Rs.) | Return |
|---|---|---|---|
|
Equity Mutual Funds |
47,960 | 23,980 | -50% |
Debt Mutual Funds |
47,960 | 53,715.2 | 12% |
Fixed Deposit |
23,980 | 26,378 | 10% |
| Total | 1,04,073.2 | 13.20% |
Comparatively, the entire portfolio would have lost only 13%. It would have to be rebalanced by buying more equities and selling debt funds. This means that without much ado the investor is buying low and selling high, a task in which even the professional investors fail regularly.
This forms the gamut of things an individual investor can do in his spare time to increase his wealth and make money work for him - Assess, Plan, Act, Track and Rebalance. With this, we hope that the investor is able to achieve the goals that he holds dear and wish him or her good fortune ahead.
