Amidst continuing volatility in the markets and with the Budget a little over a month away, investors may be getting the jitters. Already, low interest rates have made fixed-income investments unappetizing. But the end of the year is typically a good time to take stock of your investments and make suitable modifications.
Should you invest in equities or is it better to sell now?
Even if you were to bring down your allocation to stocks, avoid selling all your equities at one go. If your financial goals are far away – five years or more – then you should ideally be holding on to the investments. But if your financial goal is, say, a year down the line and you have almost achieved your target, do not hang on with your equity investment; sell and move to cash.
Gautam Kalia, Head-Investment Solutions of Sharekhan, recommends selling high-beta components of your portfolio (those that are most volatile). These include small-cap and thematic funds that did exceedingly well. Trim your exposures here. Small-cap and technology sector funds, for example, did extremely well and gave returns of 66.26 percent and 62.93 percent in the one year ended December 22, 2021 as per Value Research.
Many investors have been dabbling in small-cap stocks, initial public offers (IPOs) and even thematic equity funds without an investment view or an exit strategy in place. As the US Fed has signaled an early interest rate hike, foreign investors have consistently withdrawn from Indian equities. That gives rise to more volatility. Get rid of low-quality stocks and improve the overall standard of the equity portfolio. Good-quality stocks tend to bounce back after a fall. Poor-quality ones do not.
Amol Joshi, Founder of Plan Rupee Investment Services says, “As the stock market rallied and gave handsome returns expected over two to three years within a short span of time, you must relook at asset allocation.”
But avoid panic selling. Kalia says, “Do not sell equity mutual funds because the markets are up. Instead trim your allocation to equities if your allocation exceeds the recommended levels.”
Is it too late to invest in equities?
If you had missed the equity bus all this while, this is a good time to invest. “If the markets turn volatile ahead of budget, then it would be an opportunity for investors with less allocation to equity. Buy on dips and raise your allocation to desired levels, but moderate your return expectations going forward,” says Ashish Shanker, MD and CEO, Motilal Oswal Private Wealth.
“For new investors, systematic investment plans in aggressive hybrid and balanced advantage funds can be a good starting point,” says Joshi.
Invest some money in international funds, too. Although US is a favoured destination, experts advise caution. Kalia says, “Don't chase past returns while investing in US equities. Most are richly valued already.”
“The US has seen one of the longest bull markets over last decade. Valuations are stretched.” Shanker suggests an index fund that tracks the broad markets.
Should I shift from debt to equity?
No. Keep money earmarked for all your goals coming up in the next three years or so in debt funds.
“Long-term interest rates in India may not go up as much as their short-term counterparts. Invest some money in roll-down strategies maturing in 5-10 years. The rest of the money should be in short-duration products with one to three years maturities,” Shanker says.
If you are too worried about the interest rate movements, short duration funds should work for you. It does not make sense to park all your money in liquid funds.Last, do not sell-off your investments in gold. Allocate at least 5 to 10 percent of your corpus to gold though gold ETFs and sovereign gold bonds (SGB). When everything else falters, gold offers support to the portfolio.