 "Avoid going overweight or exiting from equities during bull markets")
The Indian stock markets have been on a high — the Sensex achieved another milestone, closing above 70,000 on Thursday. Market experts say the momentum is likely to continue.
“Downward-trending global interest rates, moderating global growth and stable domestic growth have created a Goldilocks situation for India. There is still scope for a 5-10 per cent upside over the next few quarters, barring some unexpected and sharp downturn in the global economy,” says Mihir Vora, chief investment officer, TRUST Mutual Fund.
The rising market, however, poses a dilemma for investors on whether to continue buying, reduce equity holding, or exit equities altogether. According to experts, one should avoid extreme steps and stick to one’s core asset allocation.
Avoid overexposure to stocks
The prevailing exuberance may trigger within you a fear of missing out (FOMO). However, avoid excessive exposure to stocks or equity mutual funds. “In a bull market, many buy just about anything. Pay heed to valuations and fundamentals instead of getting carried away,” says Santosh Joseph, chief executive officer and founder, Germinate Investor Services and Refolio Investments.
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Equity allocation should remain in line with the original asset allocation.
At the other extreme, some investors may want to exit stocks and equity mutual funds altogether. By doing so, you risk missing out on potential gains if the markets rise further. “Equity allocation should remain an important component in meeting one’s long-term wealth creation objective,” says Asit Bhandarkar, senior fund manager-equity, JM Financial Asset Management.
Limit small and midcap exposure
Investors should avoid over-allocating to small and midcap stocks, despite their recent strong performance.
“Valuations of mid-caps and small-caps are at highs and the margin of safety has reduced. Over-concentration of the portfolio in a few stocks or sectors and use of leverage to enhance returns are clearly the biggest risks to be avoided,” says Vora.
Allocate more money to large-cap stocks and mutual funds. “We see greater merit in allocating to large caps, given their stability, strength and reasonable valuations,” says Bhandarkar. Use a mix of passively managed index funds and smart-beta funds focusing on large-caps.
Avoid penny stocks
In bull markets, many investors trade in penny stocks. This is fraught with danger.
“Going from mid to small caps, small- to micro-caps just because the stock has not moved relative to others is a poor reason to buy. Currently, there are many stocks where the free float is very limited, and these are moving at hyper-speed. Don’t get caught in ‘pump-and-dump’ operations,” says Vora.
Closely examine your portfolio’s asset allocation to identify deviations. If you do not have an asset allocation, create one that aligns with your financial goals and risk profile.
“Having an asset allocation is crucial as it contributes to building a stable portfolio and mitigating the risk of overconcentration in any single asset or investment,” says Joseph.
If you are underinvested in equities, stagger your investments in equity or equity mutual funds (using systematic investment plans in the latter). If your equity allocation has risen, rebalance.
“After a significant bull run, the equity weight in a portfolio may exceed the desired level due to market dynamics. This could be an ideal time for investors to rebalance their portfolios by reallocating funds to other asset classes,” says Alekh Yadav, head of investment products, Sanctum Wealth.
Diversify portfolio
Diversification is a key element of portfolio construction.
“Investors must diversify across different asset classes, sectors, and instruments. They should consider their risk tolerance, return objectives, investment horizon, and liquidity needs to decide the extent of allocation to different asset classes,” says Yadav.
Allocate more to debt. “With equity valuations rising and fixed-income rates at elevated levels, one can consider making an incremental allocation to fixed income,” says Vora. One should also have a 10-15 per cent allocation to gold.