Both stock and debt markets are going through a volatile phase. Both the S&P BSE Sensex and CNX NSE Nifty have corrected over 9 percent in the last two months and it has been 6 percent each year-to-date.
The correction is deeper in broader market indices. The S&P BSE Midcap and S&P BSE Smallcap have corrected 11 percent and 12 percent in the last two months.
On the other hand, bond yields have hardened further. The Reserve Bank of India (RBI) raised its interest rates in May to tackle the inflationary pressure. The yield on the domestic 10-year G-Sec papers, which is seen as a benchmark in bond markets, has gone up by 42 basis points since May.
Here is what Radhika Gupta, MD & CEO of Edelweiss Mutual Fund, has to say on how investors can plan their investment portfolio in current market conditions.
What’s your advice for investors in such market volatility?
First, having gone through a market correction, especially new investors should really think about their risk-appetite. For investors, especially new investors, it is a good time to introspect and think whether the market volatility has made them nervous. If so, did I over-allocate? I think that is very important right now. So, investors should use this time to think about whether they have over-allocated to equities. It's a good way to understand your risk-appetite during a correction.
From the point of investment portfolio, the core portfolio of investors should remain very simple. Maybe, two-three categories of equity funds and two categories of debt funds and that core portfolio should be 80 percent of what you do. And satellite is a smaller thing, it can include theme-based funds. One of the things I have seen in this bull cycle is that there are so many exotic themes and ideas that tend to overtake the whole portfolio. I would really recommend the core and satellite approach.
Within equity, what fund categories should investors consider?
Within equity, you need to have some multi-cap/large-cap and mid-cap categories and some mid-cap and small-cap allocation. Now, that is something that you can split. There are other ways to do it. If you are more conservative, you can have a hybrid allocation, and then top it up with mid-cap and small-cap allocation for a little risk. So, there are multiple ways to do this.
How should investors manage their debt portfolio with interest rates rising?
You can take a barbell approach for debt. A contingency fund can be put in liquid and arbitrage funds and long-term money can be put in target maturity funds. You can think about tenure of the fund on the basis of what your goals are. So, don't put money in one- or two-year products in a time of rising rates, that doesn't make too much sense. Either put money in very short-term product or try to take advantage of the rising interest rates and lock money at relatively high yields.
How should investors build their international exposure, given that the international investing limits are yet to be lifted for mutual funds?
It can happen through mutual funds, but in a very limited way and investors
should not rush it, until they find the right product. If you are an evolved investor, international exposure can be 10-15 percent of your allocation. If you already have some US and emerging market exposure, you can build things up once limits open up. But, international investments should be a part of an investor’s allocation.
While limits are still open for very few schemes, if investors’ find something that works, they should use it. But, they should not rush to invest in an international ETF, just because their limits are still open. Direct investing in international equity would not be advisable.
What about gold?
Gold can be a part of the portfolio, could be 5 percent, could be 10 percent. It is not easy to time gold investments. It can be static part of an investor’s portfolio.