1. Time to review your allocation to equities

Time to review your allocation to equities

Reviews should happen at regular intervals, but modifications in the portfolio should be done only when the event is significant.

New Delhi | Published: May 24, 2017 4:05 AM
our portfolio, positive push, negative pull, Reviews, NDA regime, markets (PTI)

The environment around us is always abuzz with events. These events may have some impact on our portfolio, and we need to be aware of it. We need not reshuffle our portfolio at each and every event. The reason is, at any point of time, there are multiple events happening, some with a positive push and some with a negative pull. Reviews should happen at regular intervals, but modifications in the portfolio should be done only when the event is significant. One such occasion for review is the completion of three years of the current NDA regime. We will discuss here, what has happened in the markets over these three years and what is the likely course over the next couple of years.

Reforms undertaken
A lot of market-positive reforms have been initiated by the government. The markets have discounted these measures and have surged ahead. Taking the Nifty 50 companies PE ratio as an indicator, it has moved up from 19.6 in May 2014, measured on the historical EPS of the companies, to 24 now. Going forward, it is expected that the good work will continue. Calling an election outcome is risky, but it seems, given the popularity ratings, that the current NDA regime would win the general elections after two years and retain power for another five-year term.

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From this perspective, the market-positive environment is expected to be intact for the medium term. The India growth story is as strong as ever. To be sure, equity is a long-term proposition, unless you are a trader for short-term gains. From the PE ratio perspective, valuations are little stretched by historical PE standards, but nobody has the last word on what should be the ideal PE ratio. There may be a PE re-rating as well.

Review equity allocation
What you should do now is, review your allocation to equities. Having said that the long-term India growth story remains intact, it does not hurt to book profits, only that there may be an opportunity cost i.e. you may be giving up a part of the gains, had you been holding on. If you had earlier decided on an allocation of say 60:40 in favour of equities, equity allocation would have gone up anyway by virtue of better returns. It would now be, say, 65:35 in favour of equities.

Close your eyes, take a deep breath, and assure yourself that whatever equity allocation you decide today, is for the long term and any mid-term correction i.e. volatility would not bother you. To the extent you are sure, continue the equity allocation for another 5 to 10 years, assuming the NDA government and the good work is here to stay, fundamentals are positive and domestic investment in equity, which is very low currently (approx 4% of overall savings) would pick up gradually.

To the extent you are hesitant about your equity exposure, reduce your equity allocation in favour of fixed income. As an example, if you are at say 65:35 in favour of equities, bring it down to say 50:50. It may sound like an antithesis because equity is delivering sanguine returns. However, to the extent you are cashing out, you are taking that much money home. The profits booked in equities should be deployed in fixed income. Within fixed income, invest in short-term bond funds, since this category of funds is more stable in returns than long-term bond funds/dynamic funds /gilt funds. The purpose of cashing out from equities is to reduce potential volatility, hence it is not advisable to venture into long-term bond funds.

Even though long bond funds gain more when interest rates come down, it is not advisable to expose this part of your portfolio to relatively higher volatility. There are certain factors conducive to lower interest rates, like inflation being lower than expected, it is unlikely that the RBI monetary policy committee would reduce interest rates. The panel has taken a stand of ‘neutral’ monetary policy, implying they will not reduce rates unless there is a compelling case. If and when equity markets show a meaningful correction, you may enhance your allocation to equity, but with a long term view.

 

 

 

-Joydeep Sen, the writer is managing partner, Sen & Apte Consulting Services LLP

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