How to build and maintain a Equity to Debt Allocation Ratio

Q.       Can u please suggest how One's portfolio should be allocated when investing both in equity and debt funds in mutual funds. Right now i am all in equity.

In theory everyone would suggest different figure to you but if we only talk about mutual funds and leave alone the FDs and various other schemes that you may be holding then for a youngster, equity to debt ratio of 80 :20 is sufficient.

But the question that arose was that how to arrive at this allocation ratio.

A better question  would be how to start building your portfolio.

The answer to this ;for those who work on shore and have a regular flow of income even if a little less would be to start a SIP in a few funds and keep building it.

Such people naturally have FDs and also invest in NPS,  PPF,  EPF and other avenues which makes up for the debt portion of the portfolio.

But for unfortunate people like us who just get a few lacs every month and 6 months of leave to do what we like there is a different strategy.

This strategy like most of my colleagues are aware is the header tank on expansion tank strategy.

And this is no different then a normal STP.

Select 5 to 7 good equity funds in different AMC s and start with putting 1 lakh each in liquid or Ultra short term funds with those AMCs.

Then simply set up a weekly STP from this liquid or Ultra short term fund in to those equity funds in such a way and with such a amount that the liquid fund or the Ultra short term fund ( which can be called the source fund) does not deplete during your leave and before going back to the ship.

This part... of the source fund not getting over is more important than choosing a higher value of STP. Because under all circumstances your STP must go uninterrupted for as many years as possible.

Once you have started moving your money from the liquid or Ultra short term funds to the equity funds your exposure to equity will keep on increasing and the debt portion will keep on reducing and in roughly 4-5 years the allocation ratio of 75 equity and 25 debt will be achieved automatically.

During these 5 years if you are lucky the share market will go down and your further investment will be able to buy more units in equity funds than in a bull run. Furthermore after this downturn in the stock market when the market will start looking up your allocation ratio will automatically start leaning towards equity.

At this stage you will be able to evaluate your risk appetite and will be able to decide exactly how much percent you want to have in equity.

This process will be a continuous one ... and whenever you find that your portfolio has skewed more than 5% on either side of Equity or Debt- you can make a corrective action of shifting it to the opposite  asset- Equity or Debt.

QED