Risk Management: Allocation of funds to equity and debt

I am sure many of you might have wondered how much exposure to equity is safe at any point of time. I am 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.

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.

HDFC Standard Life Insurance has got 6 funds options to choose from
1)Growth Fund-100% in Equity Market, risk is high & so is the return
2)Equity Managed Fund - risk is shared betwen equity % govt. securities & bonds.
For More Information please visit http://www.hdfcinsurance.com/