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This is not an article and you should not mind it Most people assume that successful investing has a secret formula to it.
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To illustrate the impact of periodic rebalancing, let’s revisit our previous example of the two-mutual fund investor. Twelve months in, his portfolio value would have been approximately Rs. 73,000, but the vagaries of the markets would have distorted his original 60:40 Equity: Debt asset allocation to 43:57. Had he rebalanced his portfolio back to 60:40 by switching Rs. 13,000 from the debt fund to the equity fund at the yearend, his portfolio would have been worth Rs. 1.1 Lakhs a year later, compared to Rs. 1 Lakh if he’d chosen to remain passive – a difference of 10% within just one year.
You may choose from a variety of rebalancing strategies. You could do it once a year or quarter on a set date, or based on pre-set triggers. You could even combine the two strategies and check your asset allocation on fixed dates, but rebalance only if certain triggers have been hit. Do keep transaction costs and taxes in mind while rebalancing, though.
Choose Discipline over Timing
Investors adopt a wide variety of approaches to actually deploy moneys. Some sit on the fences waiting for the most opportune time to invest, while still others tend to get caught up in the vicissitudes of the markets and invest not as a well thought out response, but as an emotional reaction. But in the long run, few tactics beat the act of investing systematically and taking advantage of rupee-cost averaging.
|EARLY BEATS MORE|
Reema, who invests Rs. 10,000 per month from ages 24 to 29 and makes no further investments till Age 60, ends up saving more than Govind, who saves Rs. 50,000 per month from Age 47 to Age 60. Rahul, who saves Rs. 5,000 per month from Age 24 to Age 60, surpasses both by miles.
*assuming 12% p.a CAGR. Figures in Rs. Crores
Watch those Expenses & Taxes
Investment expenses are the proverbial “small leak that could sink a mighty ship”. While novice investors tend to completely ignore or downplay the impact that taxes and expenses could have on their long-term investment performance, ace investors adopt a more rational and conscious approach to it.
Brokerages, Commissions and Expense Ratios are three things you need to watch out for. As a principle, avoid purported “investments” such as traditional life insurance plans that take away a large chunk of your money up front and pay it to an intermediary. Ditto for stock market strategies such as BTST (Buy Today, Sell Tomorrow) that have a high turnover rate, resulting in hefty brokerage expenses and loads of short term capital gains. If you do not require active trading or investing calls from your broker, opt for a discount broker who will fulfil your trades at a flat rate per trade, or at low rates ranging from 0.01% to 0.05%.
|Wide Variance: Total Expense Ratios for 5 Large Cap Funds|
|SBI Bluechip Fund||1.97%|
|Reliance Top 200 Fund||2.00%|
|Franklin India Bluechip Fund||2.23%|
|Mirae Asset India Opportunities Fund||2.39%|
|Kotak Classic Equity||2.67%|
|*source: Valueresearch. Data as on 30th September 2017|
In the long run, high expense ratios associated with some Mutual Funds can erode into your returns. Some schemes operate at lower costs than others, owing to their leaner distribution structures, economies of scale, and lower operating expenditures. When deciding between two funds with similar long-term performance track records, opt for the one that has a lower TER (Total Expense Ratio).
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Beware of taxation related gaffes too. For instance, choosing the dividend pay-out option in your debt mutual funds can lead to a straight up hit of 28.33% on most of your returns, regardless of your tax bracket. Repeatedly churning your stocks before a year is through will erode 15% of your profits – a number that can really add up over the years. Remember, plugging these seemingly inconsequential leaks by pinching the pennies can lead to significantly higher wealth creation for you over the long-term.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.