Understanding the strategies to maintain optimal equity and fixed-income proportions in your portfolio
20-Mar-2023 •Sahiba Kaur Arora
I am 32 years old. I have been investing in mutual funds and shares since the last five years. But my question is how should I manage asset allocation during this accumulation phase, or to be specific when should I sell out part of the equity investment and move it to debt? - Anonymous
Great to know that you started investing early. Investing early has several benefits.
Asset allocation is a critical aspect of investing. It involves distributing equity and fixed-income assets in your portfolio, based on your investment horizon, risk tolerance, and investment goals.
Equity allocation based on investment horizon
As a general guideline, your equity allocation should increase with a more extended investment horizon. Equities have the potential to offer higher inflation-adjusted returns than other asset classes over time. However, as you approach the time when you need your funds, you should reduce your equity allocation in your portfolio and allocate more to debt.
If your financial goals are approximately three years away, investing solely in debt/fixed-income instruments is advisable. For goals that are further than three years away, you may choose to allocate a portion of your portfolio to equities.
Allocation guidelines for specific financial goals
For goals that are three to five years away, allocating around 25-30 per cent in equities is preferable. If your goals are five to seven years away, you may allocate 30-50 per cent, or even higher, in equities, depending on your risk tolerance. For goals that are seven or more years away, you may allocate even a higher portion to equities (70-80 per cent) and the remainder to debt or fixed income.
Systematic investment and exit
Additionally, since it is advisable to invest systematically via SIPs, it is equally important to exit in a systematic manner through an STP or SWP. For example, if your long-term goal is only three years away, consider transferring from equity to debt in a staggered manner instead of doing so all at once. This approach can assist you in avoiding market volatility and ensuring a smooth investment experience.
In conclusion, managing asset allocation during the accumulation phase necessitates a thorough understanding of your investment horizon, risk tolerance, and investment goals. By making informed decisions and following a systematic approach, you can create a well-diversified portfolio that can help you achieve your financial goals.
Suggested watch: What is the importance of asset allocation in a volatile market?