How do you correct a skewed portfolio?

Amit Desai has just returned from a short stint in the US, where he was working on a project. He has invested his earnings abroad in a property on the outskirts of the city he lives in India. He also owns the home he lives in. He bought it with a loan that he is still servicing. He has a few bank deposits, insurance and funds. However, property comprises almost 90 per cent of his portfolio. Should he be worried?

Young earners have the advantage of future income, which can be large enough to enable building a diversified portfolio. What looks skewed today, can be corrected over the next 10 years, if Desai ensures that his future investments are in financial instruments. He should not make any more investments in property. A diversified portfolio has both physical and financial assets and is well balanced.

Desai runs the risk of falling short of funds if there is a need, given that his investment in real estate might be tough to liquidate. He should ensure that he repays the loan as quickly as possible to keep the property unencumbered. This will enable him to take a loan against home equity.

Home equity is the value of the house over and above any loan outstanding on it, and banks may be willing to make a loan against it. Such large loans could be required if Desai decides to set up a business on his own and needs capital.

Desai should also make sure that his cash flow situation is carefully managed. Asset-heavy portfolios that are funded with loans tend to leave too little in the hands of the earner after the EMIs are paid.

Many of them fall into the trap of credit card loans that are very expensive to service. Spending habits of US-returnees who crave for a better lifestyle may also be a matter of concern. Desai should be conscious of his spending and his income in India, to maintain a good savings ratio.

Without that, he may not be able to build new assets that correct the skew and he may have to sell the property to re-balance his portfolio.

The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.