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With this volatility, your financial portfolio may have gone askew, not just in return, but also in asset allocation. But don't lose hopes. This is a great opportunity to rebalance your portfolio that aligns well with your life goals and risk appetite. If you are at a loss, how to rebalance your portfolio in the given market scenario, we tell you how to go about it:
The thumb rule
After a deep correction in equities, your equity portion in the financial portfolio may have gone below your fixed targets. Consider rebalancing it to the desired level by the thumb rule, that is, your equity exposure in the portfolio should be 100 minus your age. For example, a 25-year old young person should have 75 (100-25) per cent equity exposure compared to a 55-year old person, who should keep 45 (100-55) per cent equities. Experts advise not to have more than 10 per cent of portfolio in gold and rest you can put in fixed income or debt products. If you can take risk, you may hike your equity allocation by 5-10 per cent, while rest of the portfolio should be divided between debt and gold.
For rebalancing your portfolio you have two options. First, if you have no extra funds to invest, you may shift the funds from assets whose proportion has gone up towards the assets whose proportion has come down. Second, if you have surplus funds, you can invest it in the asset whose proportion has come down. No matter which option you choose, the target remains to reach the desired portfolio allocation.
Goal-based investment
The ongoing correction in the market must be looking alluring in terms of equity investment, considering stock market witnesses a sharp jump after prolonged and deep correction. However, you should go back to your original asset allocation when rebalancing your portfolio irrespective of how a particular asset is expected to perform shortly.
"If your goals are very near (about one-two years), you just cannot afford to take the risk of investing in volatile assets, no matter how promising it may appear. On the other hand, if your goal is more than seven-eight years away, a larger chunk of your investments should be in equities because they have the potential to generate higher returns," says Raj Khosla, Founder and MD, MyMoneyMantra.com.
Equities for long-term goals
If you are in your twenties or early thirties, you must have been running systemic investment plans (SIPs) in mutual funds for your long-term goals such as retirement or child's education. Although your returns must have turned red, you should continue your SIPs and in fact, invest more to earn better returns whenever the market recovers. Make use of market correction to exit or switch from MFs that have consistently underperformed the benchmarks.
"Usually most investor's portfolios are over diversified with too many funds. This might be a good time to simplify and reduce the number of funds. If someone is already invested in four-five good equity funds with long-term performance track record and diversified across market caps, investment styles and experienced fund managers, they can continue with their existing funds," suggests Arun Kumar, Head of Research at FundsIndia.com.
If you are a new investor, you should start SIPs in large and multi-cap funds or large-cap-biased midcap funds. Remember that quality stocks, not low NAVs should be the criteria for picking a mutual fund. "The NAV of the fund does not matter. Don't be misled into buying funds with low NAVs," suggests Khosla.
For diversification, you may also choose international mutual funds. Tarun Birani Founder and CEO TBNG Capital Advisors advise investing in US-focussed mutual funds. "The advantages of investing in US-focussed funds are the fall in the rupee value against the dollar, the moderate interdependence between Indian and the US market movements and the opportunity to invest in unique sectors that are unavailable in Indian markets."
Among stocks, choose bluechip companies since these are the ones that bounce back first when the market revives. "Most companies are available at attractive valuations, though one cannot rule out a further drop in prices. But this would be a good time to tactically allocate more to equities, and keep buying equities on every dip," says Sousthav Chakrabarty, Co-founder & CEO of Capital Quotient.
Debt for short-term goals
If you are aiming for goals that are just two-three years away, you should prefer debt instruments. Although debt instruments are relatively safer, not all are without risks. Risk-averse investors should prefer investing in FDs, PPFs and small savings schemes. Although interest rates on small savings schemes have been cut, these instruments still offer decent returns. You may also choose overnight, liquid and short-term debt funds. "Go for short-term debt funds because bond yields fell sharply following the rate cut by the RBI. They may not fall any further so long duration and medium duration bonds could yield negative returns in the coming months," suggests Khosla.
You may also consider corporate bonds and banking and PSU funds, but ensure that you are investing in high-quality papers. In the existing scenario, you should only invest in AAA-rated corporate bonds and strictly avoid credit risk funds or the ones from sectors such as infrastructure and metal where risk of default is higher due to coronavirus-induced slowdown.
"Whether you are investing in equities or debt, this is not the time to be adventurous. Risky debt instruments may be offering 1-2 percentage point higher returns, but to earn that extra 1-2 per cent, you might end up losing 100 per cent of your principal," cautions Khosla.
What about gold and real estate?
Although most Indians prefer investing in gold, it should not be the core of your investment. It is better to avoid targeting a life goal around gold investment. "Gold is at best a hedge against uncertainty and perhaps against inflation. Don't allocate less than 5% and more than 10% of your portfolio to it," says Khosla. With gold near all-time highs, your allocation may have gone above 10 per cent. You may divert the excess gold investment in equities to rebalance the portfolio.
So far as real estate is concerned, most financial planners advise investing in it only for residential purpose. One can't compare real estate with other financial assets. Liquidity has always been the biggest challenge, which has become even bigger an issue now. "Selling property at this point would be challenging considering the current situation. Even before coronavirus crisis, the situation was none too good. One could consider doing this after the crisis has blown over when the chances of success are higher," says Suresh Sadagopan, founder, Ladder7 Financial Advisories. If your portfolio is skewed towards real estate investments, you must reallocate it in equities or debt.
If you have a strong financial portfolio well-diversified among various asset classes with zero exposure to real estate, you may consider taking some exposure to it. But be cautious in your selection. "A few factors like the location of the property, the track record of the developer, the community set-up in the property, the ease of resale or the upside potential of the property, etc., should be taken into consideration," says Himanshu Kohli, co-founder, Client Associates.
Portfolio rebalancing should be a yearly affair or whenever an asset allocation rises above or falls below by 10-15. For example, people who had booked profits in equities in 2019 when indices were hitting fresh highs, would have protected themselves from COVID-19 market crash. "Investors get caught in timing the market syndrome. They don't want to sell when stock market is peaking or buy when it is down in the dumps. Rebalancing is always a contrarian call, but it lowers the volatility in the portfolio," says Khosla.