Keep an eye on the portfolio

When taking buy/sell investment calls, investors must understand that the market is not under their control

January 09, 2022 10:54 pm | Updated 10:54 pm IST

Portfolio management and asset allocation concept : Dollar bag, financial products on balance scale e.g ETFs, REITs, stocks, commodities, bonds, mutual funds, depicts balancing between risk and return

Portfolio management and asset allocation concept : Dollar bag, financial products on balance scale e.g ETFs, REITs, stocks, commodities, bonds, mutual funds, depicts balancing between risk and return

Certain basics do not change. In investments, you have to always go by your investment objectives, risk appetite, time horizon, and the risk profile of the investment asset. Having said that, let us discuss some perspectives in the context of the new year.

Equity

Calling the market level on equities i.e. trying to predict the level of Nifty or Sensex is a futile exercise. Over a long investment horizon, equity provides decent returns, significantly higher than inflation. However, over the short term, it can be volatile. In this context, one year is short horizon and 10 or 15 years is long horizon; five years or so is medium term.

Hence, do not look at daily levels of Nifty or Sensex or individual stocks, and think of tinkering with your equity exposures. Decide the extent of your equity exposure on the basis of the portfolio component that (a) is for the keeps, say 10 or 15 years, and (b) the daily price fluctuations of which will not bother you.

On the economy and corporate performance, which is the basis for equity investments, our GDP is on the path of recovery; corporate performance, particularly large corporates in whose stocks you invest, has been sanguine though MSMEs are challenged by the pandemic. Market valuation, measured by parameters such as price-to-earnings ratio or price-to-book value ratio or market capitalisation-to-GDP ratio and the like, is not cheap. That is why a long horizon is required; do not break your head over valuation levels or timing the entry, as volatility is par for the course.

For existing equity investments, as long as it is for the long term, you need not worry. Some investors are looking at booking partial profits; if the equity exposure in your portfolio is higher than your comfort level, you may do that. As an example, if you are comfortable with 60% equity and it has moved up to 70% driven by the market rally, you may exit 10% and move to ‘defensives’ such as debt or hybrid funds.

Debt MFs

In debt mutual funds, returns have been muted in the recent past, and will remain muted next year as well. The RBI is expected to increase interest rates next year. As and when interest rates move up, your returns from debt mutual funds are not good, as interest rates and bond prices move inversely. At the end of it, things improve as the accrual level i.e. the rate of return earned by the portfolio, improves.

To reiterate, this should not encourage you to tweak the debt mutual fund allocation of your portfolio. This is the relatively stable component of your portfolio, less volatile than equity. This component is anyway not expected to outperform equity over a long horizon. Your investments for near term or medium term cash-flow requirements and the long-term stability-preferred component, should be in debt mutual funds.

Deposits

Deposits such as bank deposits and corporate deposits are different from debt mutual funds.

Returns are defined, not dependent upon interest rate movements in the market. Gradually, as and when the RBI raises interest rates, deposit rates are expected to move up.

However, it will be gradual and banks have had surplus funds lying with them in the pandemic phase; they will not be in a hurry to increase rates. As and when rates improve, you may book fresh deposits or even churn the earlier ones at lower rates.

Small Savings Schemes

Popularly known as Post Office Schemes, rates here are defined by the Centre and revised quarterly, as per a formula where the base rate is that of government security traded yields in the secondary market, plus a mark-up. For quite some time, the Centre has given a rate higher than the formula rate. This is good for the public.

The question that has been floating around is: is it going to remain as high, given that the government has allowed rates higher than the formula rates? It is likely that these rates will sustain, because in the interest rate downward cycle, the rates have been maintained and in the upward cycle, which is likely to commence now, it will be easier to sustain. Upward revision is unlikely, at least in the initial phase of rate increases, as small savings rates are already on the higher side.

Gold

The utility of gold in your portfolio is that of a diversifier. The term diversifier means, over an adequate time horizon, it will reduce the volatility in your overall portfolio and optimise returns. To be noted, the objective is to optimise returns and not maximise returns. Some people are going by the fall in gold prices over the last year or so. That is not the point.

Instead of chasing a particular price or return, focus on your portfolio, which is in your hands. If you chase a particular price and buy when things are looking bright and bullish, you may end up buying at a relatively higher price. If price is low today than say one year ago, that is a reason to buy, not avoid. Allocation to gold should be approximately 10% of your portfolio, as it is a diversifier and not a staple investment — trying to predict the price next year is futile.

Siren call: crypto

Your investments should be in assets that you understand and about which you are convinced. It is better to avoid the crypto craze, if the basis of your investment is the lure of the high returns.

Conclusion

The market is not in your hands; what you can control is your portfolio. Do it judiciously, not falling for the noise around you. If cryptocurrency prices are rallying and you are not participating, it is okay; you cannot catch everything. If the market price of one of your investments is falling, you need not sell immediately as long as the fundamentals are intact. Let the new year resolution be, to have a clearer view on your portfolio rather than the markets.

(The writer is a corporate trainer and author)

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