Allocate funds to equity and debt

Many of you might have wondered how much exposure to equity is safe at any point of time. Raj Gopal suggesting two methods, one based on weighted average PE Ratio of Nifty or Sensex, and the second based on term of the policy.

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 Nifty or Sensex at bseindia.com or nseindia.com.

If weighted average PE ratio of NSE or Sensex falls in this band

PE Ratio    Equity     Debt
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 - 10   90 - 100

Most ULIPS give you free switches to transfer your investment across funds. You can use these free switches to re-adjust your allocation to equity and debt.

Fund Allocation based on the Term of the policy
In this approach, I would divide the term of the policy into two stages. The first being the aggressive wealth building stage and the second being a conservative wealth preserving stage. I would recommend maintaining a high exposure to equity for 50 to 65% of the term after which one would gradually reduce your exposure to equity. Let me try to clarify this with an example. If the term of your insurance policy is 15 years, I would suggest maintaining a high exposure to equity for 8 to 10 years. I would gradually reduce my exposure to equity for the balance of the term.

Term in Years     Equity       Debt
Upto 8 Years     70 - 100    0  - 30
8 - 10 Years     50 - 80     20 - 50
10 - 12 Years    25 - 50     50 - 75
12 - 14 Years    10 - 25     75 - 90
15th Year        0  - 10     90 - 100

In this case you are gradually reducing your downside risk by reducing your exposure to equity with time.