How would you re-balance your financial portfolios?

Q: For the last six years we have been in a recessionary environment, we have been battling inflation, growth has been down, jobs, the equity market all of it is very volatile. In a situation like this you had increasing interest rates and hence EMIs how would you rebalance your portfolios so that you can sleep easy at night?

A: The first thing to understand for everyone is that one can not be reactive. So if one does not have assets as a backup then god help you. You are really in a bad situation because then one has to really start sacrificing your provident fund, one has to go all shorts of things one does not want to do. Say if someone keeps EMI at 20 percent, follow my first rule of putting away 20-25 percent of money as investment in savings. Second, if you restrict your EMI to 20 percent of your take home pay- what happens as a result of that is, when interest rates go up or when things go a little bit here and there and one has that 5-10 percent cushion because under no circumstance should ones EMI be more than 30 percent. If one is looking from a networth perspective then for every Rs 100 that one put in real estate one should have at least Rs 200 in terms of liquid assets which could be a combination of fixed deposits, mutual funds, stocks and bonds and everything else. But one cannot have so much money locked to something which is at least a 15 year cycle. If one is really fortunate, maybe one will get a project, one will be able to sell it and walk off in five years by making a neat profit. But that happens for less than 2 percent of the people, I am sure you would agree with me. Having said that, real estate is a 10-15 year cycle by the time the whole thing gets occupied and one is able to sell out so therefore, be a little bit cautious there. Now, what happens in a bad sort of a time, if one has a little bit of backup again then that backup instead of exposing everything to volatility maybe a part of the backup, maybe a third of it if one is young, can afford to put about one fourth of it also into something which is safe like fixed deposit. Anyway we have emergency funds, contingency funds so those safe funds could be allotted to these kinds of safe goals which is 6-12 months of expense provisions, EMI provisions and medical contingency provisions. All these funds one is obviously not going to put in the stock market and that could comprise of your balance portfolio, that could comprise of your debt part of the portfolio and your safe part of the portfolio. That will help one to tight through some cushions also.