Success mantra for 2013: Keep it simple

The new year is no different as asset allocation, in line with your risk profile, remains the key for long-term wealth creation

Let's start with the basics. If you do not know where to invest your money, park the surplus in a liquid fund, so that you earn at least more than the bank savings rate. Then, in line with your risk profile and liquidity needs, make your investment policy statement. This will also enable you to have the asset allocation and portfolio rebalancing process in place.

Then, you can look at asset classes and take an overweight call, if required, in any of the asset classes — equity, debt, gold and real estate. Having a strategy is important, as volatility and the fluid political environment across the globe can make you either chase returns or make you retreat into fixed income products.

What helped in 2012 will also be your friend in 2013 — asset allocation. For debt instruments, you should go in for the longer duration ones to ensure that you continue to get the returns, locked in now. If not, then for 12 –15-month period where dynamic bond funds can also be considered. You need to be sure what gives you comfort — the accrual strategy, which will give consistent return without being volatile, or an actively managed fund, which gives you a higher return accompanied with volatility.

With the expected downward movement in interest rates, it is recommended to lock in funds marked for debt into a longer duration — 18-30 months. This will ensure that you reduce the reinvestment risk. Say, if you are going to lock-in for 12 months, with the downward movement in interest rates expected, when your investment matures, the money can only be reinvested at a lower interest rate. And, every investment which has an interest rate element carries the reinvestment risk.

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