I am Tania Jaleel
The second wave of Covid infections is looking more dangerous than what the country witnessed in 2020
And the equity market understands the risks that comes along with this bleak situation
Last week, the markets dropped sharply, bringing back memories of March 2020, when the market had declined almost 40% within a month.
Though stock prices crawled back later in the week, the reason behind the fall has not changed.
So, what should equity investors do?
In this week’s ET Wealth edition, the cover story talks about 6 steps investors should take to safeguard their equity portfolios.
These strategies are the vaccines that can possibly immunise your portfolio against a sharp downturn.
Like any vaccine, each strategy has a price, a certain degree of efficacy and also some unavoidable side effects.
The story says that a small investor’s best bet is to use 3-4 of these 6 strategies. It will cushion your portfolio against a deep loss in a market crash.
Let us take a look at 5 of these strategies
Exit completely
This is the most effective vaccine against a market crash.
Just sell off your stocks and funds and exit the market completely.
This strategy does not cost anything upfront and has 100% efficacy against a market downturn.
But exiting equities completely will upset your asset allocation and skew the portfolio.
The bigger problem is the opportunity loss you will suffer if the markets don’t crash but move up.
Exiting has other side effects too.
You will be saddled with short-term capital gains if the securities being sold were held for less than a year.
That’s 15% shaved off from the gains made on the transaction.
In case of equity and hybrid mutual funds, there may even be an exit load if you sell before 12 months.
Even if the investments were made more than a year ago, be mindful of the tax on long-term capital gains.
You will have to shell out 10% tax on the long-term capital gains beyond Rs 1 lakh.
SO, what do you do?
The ET Wealth story states that instead of a complete exit, a better option would be to book partial profits by selling off some portion of the equity portfolio.
The start of the new financial year is an opportune time to review your stocks and fund portfolio.
Focus on good quality stocks with strong fundamentals and mutual fund schemes that offer stable returns.
Your portfolio will be less vulnerable if you weed out momentum stocks and laggard schemes.
Diversify the holdings
Another way to derisk the portfolio is through diversification.
The diversification principle is best served by mutual funds, which spread the risk across a basket of stocks, sectors and market segments.
A concentrated portfolio with a few stocks is obviously riskier than a diversified portfolio, so one can consider moving from individual stocks to an equity fund.
Investors can also diversify geographically by investing outside India.
One of the guiding principles of diversification is that investment in non correlated assets reduces the risk significantly.
Therefore, experts suggest that investors should go for developed markets like the US because the risk profile of other emerging markets will be similar to that of India.
You can also reduce risk by diversifying across asset classes like debt and gold.
If you are underweight on gold, it makes sense to add now because gold prices will not be impacted by India specific problems.
Buy defensive sectors
With lockdowns being imposed in several parts of the country, demand may suffer and businesses could feel the heat again.
The high earnings growth projections that have been baked into share valuations will be revisited and prices will adjust to the reality.
Until recently, market preferences had shifted away from so-called quality stocks to cyclical names.
However, the last month has already seen a reversal in trend.
Defensives made a strong comeback as the second wave of Covid-19 virus took on bigger proportions.
Technology, pharma and consumer staples stocks are again back in favour.
Meanwhile, the looming spectre of fresh curbs is a dampener for prospects of consumer discretionary, infrastructure and construction stocks.
Experts reckon it may be a good idea to temporarily increase exposure to defensives.
However, investors should not get overly cautious and dump cyclicals.
Rebalance portfolio
Experts say rebalancing should be carried out at the end of a calendar or financial year.
Back-testing studies have shown that rebalancing delivers better returns in the long run than static portfolios that don’t make any changes.
More importantly, rebalancing lowers the volatility of returns, which helps boost investor’s confidence.
When markets crash, investors with rebalanced portfolios are less likely to panic and more likely to remain invested.
In a way, rebalancing ensures that you buy low and sell high, that too in a methodical way.
For some investors, especially those who invest through monthly SIPs, rebalancing would just mean no more investments in equities and directing the amount towards fixed income
instruments.
But for most others, it would require some profit booking in stocks and gold and reinvestment of the proceeds in fixed income options.
Keep cash ready to grab opportunities
Even when your immediate priority is safeguarding your portfolio, don’t stop thinking ahead.
If the market slide deepens, opportunities for investing will abound. At some point, you should consider making a staggered entry.
However, to do this, you must have investible surplus in hand.
Otherwise you would be left struggling to arrange funds when the time is ripe.
Identify that part of your portfolio that can be liquidated to give you the necessary arsenal when required.
For instance, some existing debt funds or fixed income investments can be used to provide the cash.
Market corrections are a routine affair
Once you have the ammunition ready, chart out a roadmap for when and how to fire it.
Experts urge investors to stay nimble.
Apart from ongoing SIP commitments, you should put in lump sums in a phased manner on further cuts.
You should target deploying fixed tranches of money at every stage of market correction.
For instance, you may invest 20% of the surplus when the market corrects 10% from a recent high.
Another 30-40% can be deployed if the correction extends to 20%.
The remaining amount can be invested in case of steeper cuts.
If you are unsure about deploying manually at market declines, consider initiating a STP from a debt fund into an equity fund over the next 6-12 months.
Do not wait on the sidelines as the market correction to play out.
Many tend to get cold feet when a correction is underway. Even when the market recovers, they hesitate to get back on the saddle.
It is only after the market recovers fully that investors realise they missed the bus.
Longer you remain on the sidelienes, further behind you find yourself when the market recovers.
And on that note, that will be all for this week
Come back next week for more wealth wisdom
