Want to tide over the stock market uncertainty? Here’s what experts have to say

Domestic equity benchmark BSE Sensex declined more than 1,500 points in the three trading sessions following weak global cues, rising crude oil prices and outflows by foreign institutional investors. Likewise, the 50-share NSE Nifty index also lost nearly 480 points during the same period.

Analysts are of the opinion that volatility will rule the roost on Dalal Street going ahead due to uncertainty over the COVID-19 pandemic, rising inflation and any hike in interest rates by central banks across the globe. Elections in states like UP and Punjab may also cause some volatility.

The 50-share Nifty declined over 2.50 per cent to 17,829 in the morning trade on January 20 against 18,308 on January 17. On the other hand, 30-share Sensex declined to 59,696 from 61,309 during the same period.

So, how can investors navigate such uncertain times? Chirag Mehta, senior fund manager, Alternative Investments Quantum AMC said that investors can spread their money across asset classes to smoothen out the ups and downs. This is simply known as asset allocation.

Mehta said that equities are one of the best asset classes to generate long term growth. But at the same time, there could be risks of downside.

“Debt can lower volatility in your portfolio and gold can limit downside risk. So, you mix all three (equity, debt and gold) in a proportion that will help you sail any kind of market environment,” Mehta said, adding a multi-asset fund of funds can be a good choice for your asset allocation needs.

Alternatively, Mehta further highlighted that there is the 12-20-80 strategy. “We have seen this work across time horizons, across cycles, be it the global financial crisis or the COVID crisis,” he said.

As per the strategy, 12 months’ worth of your monthly expenses should be parked in a liquid fund that does not take risks, be it a bank fixed deposit, or any other risk-free avenue. After setting aside 12 months of safe money, whatever money is left could be split between 80 per cent to equities and 20 per cent to gold.

“The 80 per cent of equities must be diversified across styles of equity management. It cannot be just 1 or 2 funds. If you are looking at long-term investment, I think this strategy will do the hard work for you from an investment standpoint and deliver a positive real rate of return and probably help achieve your financial goals,” Mehta added.

On the other hand, Swati Kulkarni, executive vice president and fund manager-equity, UTI AMC added that no one asset allocation is suitable for everybody.

“Most important is to understand investor’s risk-taking ability, willingness to take risk besides the financial goals and investment horizon. Equity has outperformed all asset classes including real estate over a period of 15 years. The analysis of UTI Mastershare’s rolling returns over the last 15 years shows that the probability of earning more than 8 per cent return improved substantially from 55 per cent for 1 year, 74 per cent for 5 years to 100 per cent for 10 years holding period. Thus, for those who have a long investment horizon and are willing to take the risk, higher equity allocation can be suggested,” Kulkarni added.

Given the current market valuation, she further added that a systematic transfer plan (STP) approach could be taken in addition to regular SIP. “For near term financial needs, debt funds with short duration and accrual products may be considered to mitigate the risk of rising interest rates. Gold investments help in the extreme risk-off situation and may be limited to 10 per cent,” she said.

Sunil Nyati, managing director, Swastika Investmart further added that the portfolio should always be constructed based on the investors’ risk profile. “If I want to suggest a model portfolio for investors with a moderate risk profile then I have a bullish view on the equity market therefore I would prefer a 65 per cent allocation to equity whereas 25 per cent weight should be given to debt as a diversification. Gold may also do well in the coming year amid concern of inflation therefore 10 per cent of your capital should be invested in gold via ETF or sovereign gold bond route,” Nyati said.

Also read: Promoters have raised stake in these BSE 500 firms in Q3; should you buy?

Also read: Here’s what a dozen analysts expect from Union Budget 2022