The Sensex opened at 50,000 today morning. A year ago, this number or level would have seemed a distant dream. Nevertheless, we have almost realised that level now.
We all know that this is primarily a liquidity driven rally, and that money is chasing yields. Emerging markets such as India are the current favourites for foreign institutional investors (FIIs) while allocating incremental surpluses. So, the rally continues in the domestic indices without being in sync with the ground realities of economic recovery.
Foreign institutional investors were heavy sellers in Indian equities from January through April 2020. But that have bought with a vengeance in the last three months of the calendar year. The opposite has happened with domestic institutional investors who have sold heavily in these last three months, while buying in the first three.
So, at new market highs, how should retail investors be tweaking their portfolios?
Did you book your gains?
As an individual investor, you needn’t bother yourself with these statistics, because your portfolio is directed at specific financial goals. If you are 12-18 months away from your long-term goals for which you had been investing in equity for, then go ahead and take some profits now.
A quick look at inflows in the equity mutual fund category shows that roughly Rs 13,000 crore went out of existing schemes in December 2020. New schemes rolled out in December 2020 collected around Rs 9,000 crore. This churn aside, it looks like investors have taken money off the table.
But after booking out, leaving the cash amount idle could be a huge opportunity loss, if markets refuse to correct soon or if like in March 2020, the correction is too sharp and short-lived.
If you haven’t yet gone down the profit booking route, then should you do so now?
Weed out non-performers
Predicting market movement is practically impossible. Those who sold in the crash of March 2020 may be cursing themselves now. A better strategy would be to do a quality audit of your portfolio and shift to high-quality holdings.
Whether you hold equity stocks or mutual funds, scan your portfolio for quality. If you find poor quality stocks or mutual funds, sell and re-invest in your good quality holdings. One way to do so is to see which stock or mutual fund took the longest time to regain its value after the March 2020 crash.
For example, one large-cap Information Technology (IT) company’s share, which is part of the S&P BSE Sensex, fell roughly 28 percent from its highs during the March 2020 crash. Subsequently, as the markets rallied, this stock regained its losses in three months and went on the end the year by more than doubling from the bottom. On the other hand, a large public-sector company, also part of the S&P BSE Sensex, fell 45 percent from its high at the start of March 2020 and is yet to reach the earlier level despite the rally in the last nine months.
Ensure that you utilize the value gained in this rally to get out of the laggards at a reasonable price, and shift to quality stocks or mutual funds. In a rally of this kind that we have witnessed, almost everything goes up eventually; but when the correction happens, the laggards may again fall the hardest.
It’s true that the reinvestments, if done immediately, will also happen perhaps at an all-time price; nevertheless, good quality has a way of bouncing back faster after a correction.
Use the 50,000 peak to make your shift to quality and if you are unable to discern what is good or bad in your portfolio, since now everything is in the green, then get an advisor to help you out.