There is no stopping this equity market rally, or so it seems. From the lows of March 2020, the S&P BSE Sensex has given a return of 103 percent. In the same period, mid and small-cap funds have delivered 92 percent and 117 percent, respectively. The markets may not be running scared, but the Reserve Bank of India (RBI) has sounded a note of caution. In its 2020-2021 annual report released in May 2021, it had an important note for equity markets. The central bank said the sharp rally in stock markets, despite the estimated economic slowdown in 2020-2021, “poses the risk of a bubble.”
Institutional brokerages aren’t far behind. Morgan Stanley too said it had a year-end target of around 55,000 for the Sensex as the base case. At the beginning of the year, BofA Securities set a year-end target of 15,000 for the Nifty, which is about 5 percent lower than the benchmark’s current levels.
In its first Moneycontrol Market sentiment survey held in June, 2021, six out of 10 respondents (domestic fund managers) believed that equities will generate the best return over next one year, with the Nifty expected to hit the 17,000 mark (considering the median value).
With several differing views doing the rounds, making a decision with your equity fund investments isn’t easy. Here are some ways to take informed calls.
How far are you from your investment goal?
Chances are an existing investor in equity mutual funds would be sitting on good profits. There may be some temptation to book profits.
However, if you are still far away from your goal, financial planners say it is better to stay put and continue with your investment plans in equity schemes.
“There are very few investment options out there that can beat rising inflation and equity is one of them. However, investors must be prepared for lower returns from their equity investments, from the 60-70 percent they have derived in the last year or so. Return expectations should be lowered down to 12-15 percent, which is what equity investments tend to deliver over longer periods,” says Ravi Kumar TV, co-founder of Gaining Ground Investment Services.
But, if your goals are just 6-12 months away, it’s better to take some money off the table.
Re-balance if equity part is disproportionately higher
You don’t need to withdraw. You can even rebalance your portfolio, say financial planners. This means you switch money from equity to debt, as per your original allocation levels.
For example, you might have started your investments with 65 percent equity and 35 percent debt allocation. But, the rally in equity markets may have changed that and your allocation could be 80 percent equity and 20 percent debt. In such cases, investors can partially withdraw from their equity investments, and add to the debt allocation, to revert to the 65:35 ratio.
Amol Joshi, founder of Plan Rupee Investment Services, says, “If investors have investments in different equity schemes, they can move their money from the riskier small and mid-caps to large-cap schemes.” Re-balancing need not be done by all investors. Kumar says, investors with higher risk-appetite can still continue with higher allocation to equity or mid- and small-cap funds.
Don’t stop your investments
If you wish to set aside money for just up to two years, stay away from equities. “In the near term, it is anybody’s guess which way the markets will go. Markets can be highly volatile in one-two years, as there are risks such as inflation. The possibility of COVID-19 cases rising cannot be ruled out just yet,” says Kirtan Shah, co-founder and chief executive officer of SRE Wealth.
Kumar says it wouldn’t be wise for investors to try and time the markets. “We don’t know when the correction will happen and whether it will happen at all. We will have to wait and watch, but central banks can intervene to keep inflation low and, even if inflation spikes, market reaction may not be much, as markets may have already factored them in,” he says.
He adds that new investors can consider balanced advantage funds (BAFs), which reduce equity allocation when stock market valuations become expensive and increase equity allocation when markets correct.
Also read: Why do-it-yourself investors must avoid balanced advantage funds
However, be careful while choosing a BAF, given that such schemes come with varying portfolios and allocations. Some are run more aggressively, with higher allocation to equity. Others see little changes in their equity allocation. So, it is best to check with your financial advisor for a suitable BAF.
Regular investors can consider diversified equity funds. Just remember this one rule: have an investment horizon of at least five years.