Aug 29, 2013, 03.53 PM | Source: CNBC-TV18
The basic point while doing financial planning is to stick to asset allocation plan, personal finance expert, Harshvardhan Roongta, Roongta Securities said.
Harshvardhan Roongta (more)
Principal Financial Planner, Roongta Securities | Capital Expertise: Mutual Funds
Below is the verbatim transcript of Roongta's interview with CNBC-TV18.
Q: How would you approach gold because nobody expected such a big spike to come so quickly either?
A: The basic point when one does financial planning is to stick to asset allocation plan. There are couples of factors which are considered to determine how much money will go into equities, debt, real estate, precious metals etc while drawing up a financial plan and those factors are age, the time horizon that a person has with him, the goals which is to achieved, what is risk profiling, what are his assets and liabilities. Based on these factors we determine a particular asset allocation plan in which it is decided how much goes into equity and other asset classes.
However, the basic point is when price of a particular asset was never into consideration, how movements in the price would change these allocations. The only reasons, under which an investor should change his allocation or look at allocating more or less to a particular asset class, would be if there are changes in these factors such as his retirement has been preponed or has been postponed. Therefore, under those circumstances we have to change the allocation to a particular asset class.
With respect to answering a specific question on gold, let us understand the allocation part and where does price come into effect. Only if there is a movement in the price what one need to do in his portfolio is to rebalance them. I will explain with an example, if an investor started investing about Rs 1 lakh and have taken two asset classes; equity and gold. So, 80 percent has gone into equities and 20 percent into gold. After a year, the portfolio has reduced to Rs 70,000 and gold has gone to Rs 25,000. So, the total value after a year is about 95,000. Eighty percent of that is 76,000 wherein the portfolio of equity is currently standing at 70,000. He needs to liquidate gold to the extent of Rs 6,000 and invest into equities. So, that the balance comes to 80 and 20 again.
This exercise ineffectively also helps an investor do one thing and answer a basic question; sell at the peak and buy at the lows. So, this also enables him to do that. Therefore, considering what the situation is currently, I would advice all investors to go back to their original asset allocation plan and if it entails a person to sell gold. I think this is a good time to sell; the equity market is not doing well. So, this would help them sell at this price and buy equities which are in a completely doldrums situation right now.