The Hindu Business Line : Reworking your portfolio

The increasing depth of the Indian financial market provides investors the choice to invest across multiple asset classes. Equity securities, fixed income securities, liquid instruments and alternative assets such as structured products, commodities, real estate and gold are some of the most common investment avenues, invested either directly or through mutual funds. An investor can determine his portfolio composition based on his age, socio-economic background, lifestyl e, risk appetite, liquidity requirements and, finally, the investment horizon.

Investor classification

Depending on the investor’s profile, one could be classified as an aggressive, a moderate or a conservative investor. An aggressive investor, based on his risk appetite, can take much higher allocation to riskier assets, such as equities, compared to a risk-averse conservative investor.

A suggestive strategic asset allocation for the three profiles — aggressive, moderate and conservative — is presented in the accompanying chart. The low correlation between these asset classes provides the essential diversification and a desirable risk-return profile to the investor. Ideally, depending on the profile, an investor will have a pre-defined long term strategic asset allocation. Irrespective of the Budget proposals, the strategic asset allocation of an investor should remain the same. Budget proposals will only impact the short term tactical positioning of the portfolio and some investment avenues within each of the asset class.

Budget 2008 tries to achieve a fine balance between the social and economic needs of the country. The inclusive growth orientation of the Budget will provide the necessary long-term impetus to the equity market. Though the incidence of increase in short term capital gain tax has been viewed negatively by the market, one needs to take cognisance of the fact that only a small component of the market (the cash segment) would be impacted by this change in the tax legislation.

Hence, depending on the risk profile of the investor, it would be prudent to maintain the exposure to equity at the benchmark allocation as suggested earlier. Keeping in mind the Budget proposals, one could look to increase the allocations within equity in favour of sectors related to social spending and infrastructure. Capital goods, education, healthcare and agricultural-related sectors such as irrigation equipment, fertilisers, agrochemicals and pesticides are some of the sectors which would benefit from the Budget proposals.

Switching exposures

The increase in government spending and the significant debt waiver to farmers could put pressure on fiscal management, which could change the earlier assumptions of a softening interest rate bias. From this perspective one could look at switching the exposures in long term fixed income instruments to shorter maturity instruments.

Having discussed the portfolio structuring taking into consideration the Budget impact, a good idea could be to use professional guidance and advice to help you stay on track and meet your personal and investment goals.

(The author is Managing Director and Group CEO, Dawnay Day AV.)