Uday Kotak, Managing Director & CEO of Kotak Mahindra Bank, termed it China’s Lehman moment. He added that it reminded him of the IL&FS crisis in India. Devina Mehra, Co-founder of institutional broking firm First Global said the issue is part of a deliberate move by the Chinese government to let a few businesses fail, to rein in a bigger problem.
Much has been talked about China’s Evergrande crisis and its possible impact on Indian markets. For the time being, the Chinese real estate focused conglomerate has made the interest payments, but the future is unclear.
Financial markets cannot ignore the fact that the company owes around $300 billion to bond holders. Recent crackdown in the form of debt limits introduced by Chinese authorities have made the task of repayment tougher. The market sensed the possibility of default on interest payment. The company’s bond prices crashed and stock prices dived to 11 year low.
Going by the expert opinions, the Evergrande crisis has a few more legs and the situation will change depending on the government’s response. But in the interim, there may be more bouts of volatility on the back of uncertainty and it may unnerve a few domestic investors. Here is how you can handle your portfolio volatility in the interim.
Accept volatility
To earn returns, you should learn to live with volatility. “Equity investors should always be prepared for event risks. If you are a disciplined investor, then you can use the volatility arising out of the event to your advantage,” says Nitin Rao, CEO, InCred Wealth.
“In equity markets, investors come across many incidents such as the Evergrande crisis. But going by history, sometimes, they lead to improvement in regulatory framework,” says A Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC.
If you are a long-term investor, you are most likely to benefit from intermittent volatility, if you stick to your financial plan.
Take stock of the situation
This part has two key components. You have to figure out your current asset allocation. Check how much you have allocated to each sub-segment. For example, you may have started with a 60:30:10 allocation to equity, bond and gold. The market rally may have pushed the equity proportion to around 75. Then, you know that you have allocated more to equities. But do not stop there, do check each allocation within equity. You may have decided to put say 10 percent of your equity money into small cap funds, and now that may have become 22 percent. Similarly, in debt allocation, do check if you are over-exposed to low-rated bonds or credit risk funds. Many investors allocated more to such avenues since the interest rates were low. This activity will help you to figure out where you stand so that you can plan for an informed corrective action.
Asset allocation matters
After you know the current portfolio construct, you can compare it with where you started. “It is difficult for an average investor to forecast where the markets and asset prices will be and act on it. But sticking to asset allocation works,” says Balasubramanian.
Nitin Rao concurs and says, “If your asset allocation is skewed in favour of one asset class, then rebalance it.”
Joydeep Sen, Corporate Trainer – Debt points out that investors who stuck to their asset allocation and rebalanced it from time to time managed to ride out volatile periods including the February-March 2020 fall, with relatively less drawdowns compared to those who remain invested throughout.
Make the right moves
“Valuations are rich and portfolios are also rich. If you are keen to take this richness home then gradually build some cash in the portfolio,” says Shyam Sekhar, Chief Ideator, ithought Advisory. Sell around 10 percent of your portfolio. If you have allocations to stocks or equity funds focusing on small cap, information technology or platform, chemicals and private financials, then profit can be booked gradually, he adds.
You can shift to large cap equity or bond funds from small and midcap funds, depending on your asset allocation and risk appetite. Arbitrage funds also make sense if you have a one-year time frame.
You can choose to exit the credit risk funds, if you are not comfortable holding on to them, despite their 8.68 percent returns over last one year as a category. In case of low-rated bonds, selling them near fair value is always a problem and you may have to be patient.
Sen says, “Avoid duration funds if your investment time frame does not match the duration of the scheme.”
Corporate bond funds and well-managed short duration funds with low credit risk make sense at this juncture if you want to reduce volatility.
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