Fund Allocation Based on Nifty/Sensex PE Ratio
In this approach, I decide my allocations to equity and debt based on weighted average PE Ratio of Nifty or Sensex. At higher PE Ratio levels, I advise reducing your exposure to equity. Similarly at lower PE Ratio levels increase your exposure to equity. You will be able to find weighted average PE Ratio of Nifty or Sensex at bseindia.com or nseindia.com. The reasoning behind this approach is we have lesser exposure to equity when we think the market is expensive. We have more exposure to equity when the market is cheap. The following is the asset allocation I would suggest based on PE Ratios.
|PE Ratio||Equity Exposure %||Debt Exposure %|
|Below 13||90 - 100||0 - 10|
|13 - 16||70 - 90||10 - 30|
|16 - 20||50 - 70||30 - 50|
|20 - 24||20 - 50||50 - 80|
|Above 24||0 - 20||80 - 100|
Fund Allocation based on the Term to Maturity
This approach is applicable to goal based investing, example planning for children's marriage. In this approach we decide asset allocation ratios based on the term remaining till goal or maturity. The longer the term to maturity in years, the higher the exposure to equity. The idea behind this approach is that we take higher risk when we have more time on our side. We take less risk if the by when we need to funds is less.
|Term Left from Goal||Equity Exposure %||Debt Exposure %|
|Less than 3 years||0 - 20||80 - 100|
|3 - 6 Years||20 - 50||50 - 80|
|6 - 10 Years||50 - 80||20 - 50|
|More than 10 years||80 - 100||0 - 20|