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Living Dangerously

I am 78-year-old. Nearly 65 per cent of my portfolio is invested in equities and funds (in risky mid-cap funds), as I want to maximise returns. Do I need to rebalance by portfolio?
-Amveeam

Though I am 78-year-old, I can take risks as I have saved enough for any exigency. Nearly 65 per cent of my portfolio is invested in equities and funds (in risky mid-cap funds), as I want to maximise returns. Do I need to rebalance by portfolio? You preach profit booking at targeted returns. If I book profit now, I would build a huge cash position. Where should I invest the cash after redemption? Is it a good idea to book profit now since markets are on their way up? I fear I would miss the rally
-Amveeam

Investing in mid- and small-cap stocks does not ensure great returns always. You buy such stocks because they might be tomorrow's winners. Undoubtedly some of them would become large-caps in future, but history suggests that majority of them would not. Therefore, if you have your money only in mid- and small-cap stocks, you are more likely to suffer because majority of your holdings would remain mid-caps or even turn small-caps thereby denting you returns.

Of course a smart fund manager would weed out the losers but you should keep in mind that when markets dip, such stocks sink and could damage your portfolio. Once you lose too much, it takes longer to recover. Winning also means not losing much and this you are unlikely to achieve through a mid- and small-cap loaded portfolio.

At Value Research we believe large-caps should lead an equity portfolio and mid-caps should play a supporting role. With nearly 80 per cent of your portfolio in mid- and smaller companies, we feel a prolonged bear phase from hereon could damage your portfolio beyond repair. You should give a serious thought to re-balancing now. Cut exposure to some of your funds to make way for large-cap schemes. Introducing a balanced funds won't be a bad idea either. These changes should make your portfolio steady. Even if the markets go down from here onwards, your portfolio would be equipped to handle the situation more efficiently. We are not saying that large-caps would insulate you portfolio from the downside, but they have better chances of survival.

Moving to your query on profit booking, we feel you should redeem only if you have achieved you goal. Most investors link their redemption decision with the market level. This we feel is not a great idea. Instead, one should set a goal, invest accordingly (equities if the goal is more than 5 years away), rebalance the portfolio and tilt it towards debt as the goal gets nearer and book profit once achieving the target.

With this approach, you can overcome your anxiety and need to time the market. Therefore, if you have achieved the target, redeem the money and consume it. Else let it grow.