Even though SIPs is the most preferred route to invest in equities, a lump sum should be considered when the markets correct irrationally
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Is it the time to rebalance your portfolio?

It is pertinent to ask if this is the time to rework or rebalance the portfolio, given the not-so-enthusiastic view of how economies in emerging and developed markets

  Jinsy Mathew  

Stock markets have been very volatile over the past six months thanks to the global uncertainties that cropped up one after the other. Just when the markets came to terms with the US Federal Reserve going ahead with a probable rate hike in its September policy review, China dropped a bomb by devaluing its currency - the yuan - by two per cent in order to boost its fl agging economy. This triggered a sell-off in equities globally while the defensive gold gained ground.

Given that no one was prepared for such a sharp reaction, it is obvious that one's well-planned portfolio may not be in the best of shape especially if equities outweighed debt, gold and/or realty. Even seasoned fund managers saw their gains being wiped out post Black Monday when the BSE Sensex lost almost six per cent, or more than 1,600 points. Equity schemes across categories recorded an average 6.4 per cent fall in a single trading session, slipping close to the levels where the schemes were at the start of the year.

In such a scenario, it is pertinent to ask if this is the time to rework or rebalance the portfolio, given the not-so-enthusiastic view of how economies in emerging and developed markets are progressing. And it is at times like these that asset allocation can be used to minimise losses in the way of creating long-term wealth.

Determining the extent of exposure in each asset class as per one's risk appetite does not complete the asset allocation procedure. Other than choosing the right product, periodic review of the portfolio performance is also necessary. Historically, none of the asset classes have moved either up or down in tandem. Hence, there is always an opportunity to manage one's losses if the portfolio is tactically spread across the various asset classes.

So, should one rebalance the portfolio in the light of recent developments in the fi nancial world? Ashish Shanker, Head, Investment Advisory, Motilal Oswal Private Wealth Management, feels that the best thing to do right now would be to stay put rather than making any knee-jerk reactions because any choice made during volatile times would be based on emotion and not logical thinking. He says fresh allocations to equities should be made in a staggered manner to large caps now and not mid and small caps, as large-cap stocks will be the fi rst to gain once the market revives. Shifting to debt wouldn't be the most logical view given that equities are much more attractively placed, he feels.

However, shuffl ing one's portfolio just to adjust to short-term developments in asset classes makes no sense as each portfolio is tailor made to achieve one's long-term fi nancial goals taking into consideration the time horizon and one's ability to tolerate risk.

Feroze Azeez, Deputy CEO, Anand Rathi Private Wealth Management, says a change in the strategic asset allocation is warranted only if there is a change in the circumstances of the investor or a change in the long-term fundamental dynamics of any asset class. He observes that even though investorstalk about asset allocation, very few manage to get the asset mix right.

Market participants say a particular asset that is in limelight (equities currently) typically gets most attention and so psychologically the portfolio gets skewed in that direction irrespective of one's risk appetite.

However, one should remember that an appropriate amount of risk is warranted in investments to generate returns to achieve long-term targets. "Every year a different asset performs well and tinkering with one's portfolio accordingly may not be the best idea," says I.V. Subramaniam, CIO of Quantum Advisors. "It is important to relook at the assumptions made earlier while building the portfolio and any change to it must be done only if there is any drastic change like annual cash fl ow, marriage or any other important event in one's life."

Even though Systematic Investment Plans (SIPs) is the most preferred route to invest in equities, a lump sum should be considered at times when the markets correct irrationally based on some near-term fears that may be local or global in nature. At such times, when one asset class becomes cheap and attractive, then shuffl ing makes sense, according to Subramaniam. For example, if there is a further 10 per cent correction in Indian equities, then a lump sum should be deployed as the benchmark indices will be below their long-term averages.

Good returns can be generated if one can buy below the long-term average of Nifty. From that perspective, the markets are cheap currently but not very attractive yet.

During bouts of euphoria like the one during 2008 and last year, equities were on everyone's radar and many had even moved out of debt and gold, as the returns from these two were tepid. Due to this move, fi nancial advisors warn that many were caught on the wrong foot as equity markets corrected from all-time highs and ended up losing more than anticipated.

So, what can be done? If an investor had invested in equity and debt in the ratio of 50:50 at the start of each quarter, then this ratio would be different after a few quarters due to good returns generated from stocks. In such a scenario, it would be necessary to book profi ts from equities and channel the gains back to debt such that the earlier decided ratio is maintained.

As Gajendra Kothari, MD & CEO of Etica Wealth Management, notes: "It is important to maintain the proportion in asset allocation as every element has a defi nite role to play. Even though gold may not be the best performer, it balances the portfolio during volatile times, lending the role of an anchor and minimising losses in turn."

Subramaniam concurs with Kothari. He says gold will come to usein times of crisis or during infl ationary periods. Hence, it is advisable to allocate 10 to 15 per cent of one's portfolio in gold, irrespective of the way the yellow metal or another asset classes are performing. Hence, those who sold gold from their portfolio to increase their equity exposure should systematically cut back on stocks and take renewed exposure to the yellow metal in the form of gold exchange-traded funds (ETFs) to bring back the much-needed balance in the portfolio.

Now coming to the next asset class - real estate. Property developers have been in a tight spot ever since the government started to aggressively curb tax evasion. Another negative factor is the high interest rates that have prompted many home buyers to keep their plans on hold. Builders are doling out freebies to clear inventories that are a near fi ve-year high, and at several locations distress sales have started.

Kothari advises that those looking for second homes can wait for the time being. "The best move right now would be to create a watch list as to the locations where one is interested and look out for distress opportunity. Unlike equity, it is generally observed that corrections in real estate take a longer time to recover," he adds.

AVAILABLE OPTIONS

The best options one can consider currently are large-cap and multicap funds. Small and mid-cap funds are other options if one wants to invest over a larger time frame, preferably over fi ve years. Considering that the India story is improving and when the global overhangs are out of the way, Indian equities would be a preferred investment destination of foreign institutional investors.

In the light of these facts, large caps are poised for a rally. Also, large-cap funds offer stable returns. Multi-cap funds invest in stocks across market capitalisations. These funds manage to capture the upside in both the broader markets and the large caps as the fund manager has more stocks to choose from.

Coming to the third option - small and midcap funds. Those holding these funds over the past two to three years will be a happy lot. The reason being that these funds tend to perform extremely well in a rising market as was the case since 2014. However, when the downturn is around the corner, these are the fi rst to fall. Therefore, if one is into equity markets for a long haul, then these funds can prove be a good bet. You can also invest in markets through SIPs. By investing every month they average out returns in the long run.

Periodic rebalancing is the key to ensuring that the portfolio remains healthy. Stick to your asset allocation plan if it was well thought out. Any knee-jerk movement in an asset class needn't merit portfolio rebalancing as these plans are drawn for long-term targets. Indiscipline or excess reviewing of one's portfolio will lead to volatile returns, thereby missing long-term goals.