Locking in gains
How to protect your profits in this stock market
- Jul 8, 2017,
- Updated Jul 12, 2017 12:42 PM IST
Stock markets have rallied sharply over the past few months. The S&P BSE Sensex, the broad market indicator, touched an all-time high of 31,311 on June 19, 2017. It has delivered a year-to-date return of 16 per cent (till June 29). The S&P BSE Midcap and the S&P BSE Smallcap indices have risen 21 per cent and 27 per cent, respectively, over this period.
This means many people will be sitting on decent gains and wondering whether to stay put or cash out. It is not an easy choice. If the market continues to move higher after they book profits, they will find themselves entering at a higher valuation, which will affect their portfolio returns. Or, they may remain invested, but markets may correct. The short point is that timing a market exit and re-entry requires a fair bit of experience and expertise and is, therefore, considered beyond the scope of most retail investors. This is especially true in the current market as experts are upbeat about equity markets over the long term but are not ruling out short-term gyrations due to high valuations, uncertainty over implementation of the goods and services tax and foreign institutional investor flows.
"GST might lead to savings in the cost of doing businesses. Further, GST, as well as demonetisation, will lead to a significant reduction in parallel economy over a period. At the same time, savings are moving from physical to financial assets. All these can lead to far higher growth over a long period. But from a shorter term perspective, the valuation looks high. However, as they say, markets can remain irrational for more time than you can remain solvent," says Abhishek Anand, Fund Manager at Centrum Broking.
Despite the short-term uncertainty, experts are not advising investors to go underweight on equity. "We are not advising investors to go underweight on equity. We are strictly following the asset allocation guidelines," says Nishant Agarwal, Senior Director & Head, Wealth Advisory Solutions, ASK Wealth Advisors.
"For an investor who lacks the experience of multiple cycles, the simpler, and wiser, strategy is to keep averaging and stay the course," says Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management.
The past two years have been particularly good for debt investors as falling interest rates and 10-year benchmark yields ensured double-digit returns. In 2017, the yield on the 10-year paper started hardening after the RBI changed its stance from accommodative to neutral, surprising many. The yields went up from 6.2 per cent in December 2016 to 6.9 in May 2017. Over the past one month, they have again come down to around 6.4 per cent due to low inflation, expectation of normal monsoon and stable rupee even after rate hike by the US Fed. It means markets are looking forward to a rate cut in the coming months.
"If the RBI gets the comfort of consumer inflation remaining in the band of 4-4.25 per cent, it needs to maintain repo rates at 5.50-5.75 per cent levels. This could give it scope to cut rates by 50-75 basis points. In that case, the 10-year benchmark paper can trade in the 6.10-6.25 per cent range," says Murthy Nagarajan, Head, Fixed Income, Tata Asset Management.
However, in spite of yields falling in expectation of a further rate cut, experts are still advising investors to lower expectations from debt funds and invest in accrual funds for lower volatility in returns.
Accrual funds focus on earning returns by investing in high interest rate bonds while duration funds generate returns through capital appreciation by taking exposure to higher maturity papers in a falling interest rate scenario. "People should consider accrual funds to earn steady returns with low volatility. Existing investors can continue to hold dynamic bond funds as a possible rate cut can trigger a rally. For fresh investments, accrual funds are the best, as the possibility of earning high returns through an interest rate rally may be lower this year compared with last year," says Bala of Fundsindia.com.
"Investors who are risk averse but have a holding period of more than three years can look at short-term bond funds. Those with a higher risk appetite can invest 70 per cent in a short-term bond fund and the balance in a dynamic bond fund," says Nagarajan.
Stock markets have rallied sharply over the past few months. The S&P BSE Sensex, the broad market indicator, touched an all-time high of 31,311 on June 19, 2017. It has delivered a year-to-date return of 16 per cent (till June 29). The S&P BSE Midcap and the S&P BSE Smallcap indices have risen 21 per cent and 27 per cent, respectively, over this period.
This means many people will be sitting on decent gains and wondering whether to stay put or cash out. It is not an easy choice. If the market continues to move higher after they book profits, they will find themselves entering at a higher valuation, which will affect their portfolio returns. Or, they may remain invested, but markets may correct. The short point is that timing a market exit and re-entry requires a fair bit of experience and expertise and is, therefore, considered beyond the scope of most retail investors. This is especially true in the current market as experts are upbeat about equity markets over the long term but are not ruling out short-term gyrations due to high valuations, uncertainty over implementation of the goods and services tax and foreign institutional investor flows.
"GST might lead to savings in the cost of doing businesses. Further, GST, as well as demonetisation, will lead to a significant reduction in parallel economy over a period. At the same time, savings are moving from physical to financial assets. All these can lead to far higher growth over a long period. But from a shorter term perspective, the valuation looks high. However, as they say, markets can remain irrational for more time than you can remain solvent," says Abhishek Anand, Fund Manager at Centrum Broking.
Despite the short-term uncertainty, experts are not advising investors to go underweight on equity. "We are not advising investors to go underweight on equity. We are strictly following the asset allocation guidelines," says Nishant Agarwal, Senior Director & Head, Wealth Advisory Solutions, ASK Wealth Advisors.
"For an investor who lacks the experience of multiple cycles, the simpler, and wiser, strategy is to keep averaging and stay the course," says Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management.
The past two years have been particularly good for debt investors as falling interest rates and 10-year benchmark yields ensured double-digit returns. In 2017, the yield on the 10-year paper started hardening after the RBI changed its stance from accommodative to neutral, surprising many. The yields went up from 6.2 per cent in December 2016 to 6.9 in May 2017. Over the past one month, they have again come down to around 6.4 per cent due to low inflation, expectation of normal monsoon and stable rupee even after rate hike by the US Fed. It means markets are looking forward to a rate cut in the coming months.
"If the RBI gets the comfort of consumer inflation remaining in the band of 4-4.25 per cent, it needs to maintain repo rates at 5.50-5.75 per cent levels. This could give it scope to cut rates by 50-75 basis points. In that case, the 10-year benchmark paper can trade in the 6.10-6.25 per cent range," says Murthy Nagarajan, Head, Fixed Income, Tata Asset Management.
However, in spite of yields falling in expectation of a further rate cut, experts are still advising investors to lower expectations from debt funds and invest in accrual funds for lower volatility in returns.
Accrual funds focus on earning returns by investing in high interest rate bonds while duration funds generate returns through capital appreciation by taking exposure to higher maturity papers in a falling interest rate scenario. "People should consider accrual funds to earn steady returns with low volatility. Existing investors can continue to hold dynamic bond funds as a possible rate cut can trigger a rally. For fresh investments, accrual funds are the best, as the possibility of earning high returns through an interest rate rally may be lower this year compared with last year," says Bala of Fundsindia.com.
"Investors who are risk averse but have a holding period of more than three years can look at short-term bond funds. Those with a higher risk appetite can invest 70 per cent in a short-term bond fund and the balance in a dynamic bond fund," says Nagarajan.