Balance investment portfolio: Check why equity allocation should reflect financial goals

An individual who started investing aggressively when markets were doing well said that they are now uncomfortable with their level of equity exposure. They asked Mint whether they should reduce their investing even though their long-term goal is still several years away.

In response to the query, Feroze Azeez, joint chief executive at Anand Rathi Wealth, said that the time a person starts investing can make a big difference to how they view their portfolio.

To explain it better, Azeez said the investors who started before 2020 and those who began investing more heavily after 2020. “If you started after 2020, you have seen a lot happen in a relatively short period,” he said, noting that markets recovered strongly after the pandemic and continued to rise, with equities doing particularly well through much of 2024.

In September 2024, the Nifty 50 reached a high, after which markets became more volatile, moving up and down more sharply.

For some investors, Azeez said, this may have changed how comfortable they feel with risk. “A portfolio that seemed perfectly comfortable when markets were rising may now feel overly invested in equities.”

On the other hand, he said, those who started investing before 2020 may have already experienced more market cycles and seen how equity can reward investors who stay invested over the long term.

Align investments with goals

According to Feroze Azeez, investors questioning their equity exposure should look past current market conditions and focus entirely on their specific financial objectives and timelines.

For instance, a long-term goal like retirement 20 years away justifies a heavier equity allocation. Based on an individual's risk tolerance, financial standing, and return expectations, an allocation of 60-80% in equity—with the remainder in debt—can be considered. While equity historically provides superior long-term growth, incorporating debt creates a more balanced portfolio.

Adjust for the time horizon

Azeez noted that this strategy must shift for shorter-term goals. If funds will be needed soon, it is prudent to reduce equity exposure and shift a larger portion into debt or other stable alternatives, potentially including arbitrage funds, depending on one's tax bracket.

Medium-term goals, such as buying a house in seven years, require a middle ground, he said. In these scenarios, a 50-70% equity allocation can still provide necessary growth, while debt introduces greater stability as the target date approaches.

Establish a financial buffer

A frequently overlooked component of this strategy is the need for a financial safety net.

Azeez highlighted that maintaining an adequate emergency fund, alongside proper health and term insurance, prevents investors from having to liquidate equity investments in the event of unexpected emergencies.

Therefore, feeling uneasy about equity exposure does not automatically mean an investor should reduce it. The primary concern is whether the portfolio remains suited to their goals.

Azeez recommended regularly reviewing asset allocation and diversification, making adjustments only when personal circumstances or objectives change.