The Tribune, Chandigarh, India

Should market decide your asset allocation strategy?
Prashant Sharma

Selecting an asset allocation strategy is the key decision for most investors while building a long-term investment programme. However, the recent incidence of extreme volatility in markets has raised questions about the best way to follow asset allocation.

One should look for investments that will earn enough to outpace the cost of living. Asset classes generally include stocks, debt (Govt. Securities, Bonds), commodities like gold or silver and property. Your risk tolerance and investment objectives should be the key factors while choosing what percentage of your investments should be put into each of these asset baskets. Asset allocation involves making hard decisions about which assets to buy and what ratio of each asset to hold.

Once an asset allocation is determined and invested, the best decision is to stay invested and not tinker with the portfolio too much. Investors should understand that the chances of meeting their goals will not be maximised by chasing the latest market trend but by defining and sticking to appropriate asset allocation strategies over the long term. One should not indulge in altering the portfolio for interim market changes.

As falling markets make investors nervous, it is advisable to spread your investments across asset classes. A good asset allocation strategy can help you make prudent investing decisions. Here are some strategies that investors should follow in volatile market conditions.

Be disciplined

Disciplined investment strategies such as rupee-cost averaging can help even out market instability. Rupee-cost averaging is the practice of investing fixed amounts in equities at fixed periods of time. As time passes, your average price per share is reduced and helps you withstand a volatile market. This strategy makes the market variations work for you and decreases the risk of investing all your money just before a market decline.

Invest for long term

Enter the market with a long-term investment horizon. Long-term investing allows you to be committed to a sound investment plan that begins with a proper asset allocation suitable to your risk tolerance over a period of time. A long-term investment approach typically ranges between 5 and 20 years. It is nothing but a mindset that offers perspective and discipline as you work towards your financial goals. More importantly, it helps you from making mistakes based on your short-term perceptions.

Be realistic

While setting prospects from any investment make a realistic estimation of the returns you anticipate from the investment. Past performance only presents a sign of the historical returns and there is no guarantee that history will repeat itself.

Keep emotions at bay

Don't let your emotions drive your decisions. One should stay focused on long-term investment goals to help ensure your plans stay on track. A purposeful and planned examination of the situation, taking into consideration the investment objectives and time frame, is an important pre-requisite for achieving financial success.

Eliminate the need to time investment decisions

It can be alluring to react to market volatility by trying to time the market. But effectively timing the market requires you to make two correct decisions that are complex to make: when to buy and when to sell. This is a risky game to play. Moving in and out of the market by timing its ups and downs is an art that even the most experienced investment professionals have not mastered. Regular investment - in both rising and falling markets - should produce more consistent results over time.

Stick to your strategy

Select an asset allocation that aligns with your long-term goals, time horizon and risk tolerance. As your objectives and risk tolerance change, make amendments to your allocation and continue to rebalance to keep the strategy in control since rising and falling stock markets are a fact of life.

Rebalance your portfolio

Rebalancing is a disciplined method of maintaining proper allocation to each asset class in your portfolio. Besides keeping your asset allocation on board, rebalancing can help ease the risk in your portfolio. Periodic rebalancing also assists in reducing the chance that your portfolio will be overexposed to one particular asset class. In general, it's a good idea to rebalance your portfolio at least every 12 months. This control helps you keep your asset allocation on track.

Key principles

Setting a suitable asset allocation strategy for your investment goals

Sticking with that strategy as long as your personal situation remains steady and not trading for market timing or a panic situation

Performing due diligence on the investments that you are considering for your portfolio

Monitoring your portfolio and rebalancing it

Conclusion

Asset allocation accounts for the majority of deviation in investment returns. Therefore, research efforts should be focused on examining and adjusting asset allocation rather than market timing or security selection. Choosing an appropriate asset allocation strategy and accomplishing periodic reviews will ensure that you retain long-term investment goals and attain the desired return with the lowest amount of risk possible.

The author is Chief Investment Officer, Max Life Insurance. The views expressed in this article are his own and do not in any way reflect the views of the company

tax advice
No tax on interest income from PPF a/c
sc vasudeva

I have a PPF account in my name. Now, I have opened a PPF account in the name of my minor son. My wife also has a PPF account in her name. My wife and I are filing IT returns. Our minor son does not have any income, except the interest on his PPF a/c. Normally, interest on PPF a/c is not taxable. Please clarify whether the interest earned on the minor's PPF a/c is to be clubbed with the income of the parent having higher income.
— Sarabjit Singh

Interest earned on a PPF a/c is exempt from tax. Therefore, the interest earned on the minor's PPF a/c need not be clubbed with the income of the parent as such interest does not form a part of the total income of the minor.

I am a senior citizen and will be 80-year-old during the financial year 1.4.2014 to 31.3.2015. My date of birth is February 25, 1935. I am handicapped and claim Rs 50,000 as rebate in the income tax return every year, my disability being 54%. Now, since I will be 80 years old, I understand I will not be required to pay income tax as my income will not exceed Rs 5,00,000. If in coming years my pension increases, and total income exceeds Rs 5,00,000, can I get the benefit of rebate of Rs 50,000 as stated above or not? — KK Sanon

An assessee whose income does not exceed Rs 5 lakh and who is of the age of 80 years or more is not liable to pay tax if his total income from all sources does not exceed Rs 5 lakh. In case your income exceeds Rs 5 lakh, you would be entitled to claim the benefit allowable under Section 80U (deduction on account of disability) of the Income-tax Act, 1961 (The Act) provided you comply with the requirement of said sections. I may add that in such a case your total income from all sources should be at least Rs 5.50 lakh so that the total income gets reduced to the non-taxable limit of Rs 5 lakh.

Is a charitable organisation, which is registered under the Societies Registration Act, the Income Tax Department under Section 80G & 12A, and has received the Home Ministry's approval for receipt of foreign grant

Permitted to buy shares in public limited companies?
Allowed to buy shares of public limited companies and give it to workers who hail from our target communities?

Your reply will be of much help to many NGOs who are having some kind of Reserve Fund to make some investment either on their behalf or on their target group's behalf. The benefit from the share/investment will go to the community only. — Vinod Kumar

Sub-section (5) of Section 11 of the Income-tax Act 1961 (The Act) deals with the forms and modes of investing or depositing the funds which are accumulated by a charitable institution which have to be utilised for charitable purposes in succeeding five financial years. This section does not provide for investment in shares of a company in clauses (i) to (xi) of the said sub-section. Clause (xii) of sub-section (5) of section 11 of the Act does contain a residuary provision for "any other form or mode of investment or deposit as may be prescribed". The prescribed list also does not contain any provision regarding investment in shares of a company. Apart from Section 11 of the Act, Section 13 contains restrictions regarding investments of funds in shares of companies, including a public limited company, by charitable institutions registered under Section 12A of the Act. Therefore, in my view, at present a charitable institution is neither permitted to invest in shares of a public limited company nor it can buy such shares for giving it to the workers who hail from the target community.

Bank charges for services: Are these justified?
Harsh Roongta

My son is studying outside Mumbai and I had transferred some money to his bank account for his use. After some time, I asked him whether the money had hit his account. He told me he would have to visit the bank's own ATM to check that out. I was shocked that his bank was not providing an SMS alert facility. I asked him to check out the balance on his bank's mobile app. He told me that as per the bank's rule, the mobile app was made operational only three months after the account was opened and for operating the mobile app he had to personally visit the bank's branch. Although he had recently completed three months, he had not yet found the time to visit the bank's branch. He also told me that he would withdraw the cash only from the ATM of his own bank otherwise there was a stiff charge if he used another bank's ATM. I found all this surprising. What was even more surprising was that my son was not studying in a backward district of India but in Helsinki - the capital of Finland - an advanced European country.

This was a revelation to me and I resolved not to take the services of Indian banks for granted again. This was put into context for me when I was involved in a conversation regarding the justifiability of banks charging Rs 850 as charges for inadvertent bouncing of a cheque. It seems bankers are always thinking of new ways to charge clients for services that were hitherto free or hiking charges several fold for existing paid services. Whether it is for SMS alerts or for maintaining minimum balance on a monthly basis rather than on quarterly basis or for depositing cash in your account in non-home locations or charging you for withdrawing cash at your own bank's ATMs. The last one is still in the proposal stage.

In their quest for acquiring consumer accounts, banks have been providing a lot of technology enabled services which were all provided for free initially. There is resistance when the banks want to charge for these very services. Under normal circumstances, consumers would have shrugged their shoulders and paid the higher charges just like they do for a host of other services.

Meanwhile, the banks cost structures are clearly under pressure. Changes in regulations and the imminent enforcement of some long-standing regulations are pushing up the cost side of their balance sheet apart from the general cost inflation. For example, think of the interest on savings bank accounts. From calculating interest on the minimum balance between the 10th and the last day of the month, it is now on a daily basis and that rate too has gone up. The old calculation method meant that banks effectively paid around 1.50% only against the nominal rate of 3.50% then. Now even the nominal rate ranges from 4% to as high as 7.50% in some cases. This has significantly increased the cost of funds for the banks. Technology and competition has made products such as fixed deposits linked to savings bank products a standard feature rather than a premium product. There are a host of old regulations that were blithely being ignored but it may no longer be possible to do so. All this pushes up costs significantly. The high earnings from distributing insurance products have already slowed down and threaten to decrease if they are forced to become "brokers". The "L" word (standing for Liability) looms on the horizon as banks are being forced to be more accountable for their actions whether to buyers of third party products through them or victims of online or credit card frauds.

So to maintain these levels of service, it would seem justified for the banks to increase their service charges in line with the increase in costs. But they clearly have an issue in terms of the fairness of their consumer service and need to work on that urgently.

The author is CEO, Apnapaisa.com. The views expressed in this article are his own