Stock market volatility: It is a good time to rebalance equity portfolio

Equities offer the best potential for wealth building over the long term. Investors need to invest time and effort in acquiring skills to improve their stock selection, timing, money management skill

Investing in equity portfolios can be an excellent wealth-building opportunity for both new and experienced investors. Prior to the Lok Sabha 2024 elections, stock markets were nervous, which was expected.

The decline in equity flows reflects investors' nervousness ahead of the Lok Sabha 2024 elections amid high index levels. This could be addressed once the election outcome is known, or if the index corrects itself. Additionally, if the corporate earnings of the Nifty 50 index start to accelerate, investors will become more comfortable with the high index levels. 

While opinion polls are predicting an easy win for the Narendra Modi-led National Democratic Alliance (NDA) in the general elections 2024, the markets are not prepared for an outcome similar to the 2004 elections (BSE Sensex declined 15.5% on May 17, 2004, the election result day).

The Indian stock markets are currently pricing in the continuation of the government and the ongoing reforms. Any deviation from these expectations results in volatility, mostly in a downward direction. The pre-election rhetoric is taken seriously by the population. What is more important is the post-election action.

The lower win ratio for the NDA may reflect on the leadership and policies of the present government and could weigh on investors' minds for some time. However, they could return to business as usual later. In anticipation of this hesitation, markets may react negatively, but after the fresh policy announcements or the Union Budget, they may start gaining momentum again.

Portfolio rebalancing

Investors should not fear volatility but should get used to it and, in fact, try to benefit from it. Adding to investments can be done during any weakness that arises post the election results. This could also be a good time for portfolio rebalancing.

Rebalancing existing portfolios can help optimize equity exposure by removing underperforming stocks and taking exposure to newly identified growth stocks or increasing weights in good stocks in the portfolio. Leveraging market corrections can result in seizing missed opportunities.

India is experiencing growth driven by demographics, aspirations, strong earnings, infrastructure and social spending, and various opportunities. 

Despite the uncertain nature of elections, India's upward momentum in the Indian stock market and the economy shows no signs of slowing down. 

India’s economy, the fastest growing among significant peers, is expected to remain strong, growing at 6.5-7% in the current fiscal year. The HSBC India Services PMI for April 2024 came in at 60.8 - the 33rd straight month of growth in services activity. 

India’s Manufacturing Purchasing Managers' Index (PMI) in April stood at 58.8—the second-strongest expansion since the beginning of 2021. India's industrial growth came in at 4.9 percent in March 2024, compared to 1.9 percent in the year-ago period.

Land of opportunity

India is seen as a land of opportunity by international investors and brokerages such as JP Morgan, Citigroup, CLSA, Goldman Sachs, Nomura, etc. Although Indian stocks’ valuations are not attractive, they are not at euphoric levels. Global funds’ positioning in India’s $4.3 trillion stock market remains light, and investors may use any correction arising out of elections as an opportunity to increase holdings. India is set to gain weight in the emerging market allocation.

The recent success of various initial public offers (IPOs), New Fund Offers (NFOs), new demat accounts, and systematic investment plans (SIPs) is a testament to the continued vitality of investors. Flows via SIPs, a monthly contribution, touched a new high of Rs 20,371 crore in April 2024. 

In terms of the number of IPOs, there were 78 IPOs in FY24 on the mainboard, which is a 16-year high that collected Rs 67,561 crore between them. For FY24, the total investor response to IPOs represented an oversubscription of 35.47 times. The assets under management (AUMs) for the domestic mutual funds industry increased nearly Rs 14 trillion, or 35 per cent, to a record Rs 53.40 trillion as of March 2024. 

In FY24, the Indian mutual funds collected a total of Rs 66,364 crore across a total of 185 new fund offerings (NFOs) during the year. This is despite the adverse tax effect on debt funds (no indexation benefits) and the SEBI prescription of having only one fund in each category by a fund house. 

FY24 saw 3.69 crore new demat account additions compared to 2.67 crore additions in FY23. Demat accounts continued to rise at a fast pace, with total demat accounts crossing the 15.1 crore mark at the end of March 2024.

All these factors are set to drive momentum and paint a bright growth story for India. Indian investors must get rich before they get old. Equities offer the best potential for wealth building over the long term. Investors need to invest time and effort in acquiring skills to improve their stock selection, timing, and money management skills. 

Investment in equities has a caveat that in the short term, markets can correct sharply, which may erode capital, and markets are known for time correction. Therefore, money management skills, patience, and portfolio rebalancing may be helpful.

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Dhiraj Relli is MD & CEO, HDFC securities. Views are personal.