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Bull run on bourses: It's time to rebalance your portfolio

Bull run on bourses: It's time to rebalance your portfolio

Although the prospects of the stock market look promising and there is a case for investors to rebalance their portfolio by including equities in it, it is important for them not to get carried away.

Hemant Rustagi
With Indian stock market touching dizzying heights, investors are having mixed emotions of awe and fear. While those who stayed away from the market have been watching it rise to an all time high in awe, existing investors are faced with the fear of losing all the gains they have made. The situation is even tricky for those who have been selling their equity holdings over the last few years.

It's not that the stock market has not provided opportunities for investors to make money during this period. Most of them faced disappointments because they did not make any fresh investments during the market downturn. In fact, all those investors who continued their disciplined investment approach during this period made handsome returns. However, considering that their number was quite insignificant, it did not help in changing the perception about stock market investing. When the market started spiraling downwards, most investors preferred to invest in gold and debt for the first couple of years and thereafter shifted their attention to debt instruments. No wonder, they either have low exposure to equities or have no exposure at all.  

On the stock market front, the scenario started changing over the last six months or so. The expectation of the BJP-led government coming to power, improving fundamentals and buoyant FII inflows gave the needed fillip to the stock market. Most investors expected the stock market to run out of steam and hence used every rise to pare their exposure to equities. However, the results of General Elections 2014 gave the stock market the push it needed to scale an all time high level. Although it will not be prudent to expect miracles from the new government overnight, the single party majority gives it a platform to initiate the process for putting India's economy back on track.

It is evident that if the government led by Narendra Modi takes the right steps, the stock market is likely to witness a sustained rally. Surely, these can be testing times for investors. Many investors must be wondering whether they should be investing in the markets at the current levels or not.

Although the prospects of the stock market look promising from the long-term point of view and there is a case for investors to rebalance their portfolio by including equities in it, it is important for them not to get carried away by the euphoria that exists today.

The right way for a common investor to invest in equities would be to follow a goal-based strategy rather than investing with the sole objective of making some quick money.

A goal-based investment strategy requires investors to entail an asset allocation model. Simply put, it ensures that only that part of the portfolio which is earmarked towards long-term goals is invested in equities. Besides, it encourages them to invest for a defined time horizon which helps in honouring their time commitment. In other words, they find it easier to not only remain invested during volatile times but also continue their investment process that allows them to benefit from "averaging".

It is also important to choose the right investment vehicle to invest in an asset class like equity.

For investors who do not have the wherewithal to invest directly into the stocks, mutual funds would be an ideal choice to invest in equities. Mutual funds are diversified by nature and offer a variety of equity funds to investors. In fact, it will not be wrong to say mutual funds allow both i.e. new as well as an experienced investors to design a portfolio as per their risk profile. On the one hand, there are diversified funds that allow investors to invest in different market caps in the proportion they want, on the other hand, there are thematic, sector and specialty funds that allow experienced and aggressive investors ti supplement their stocks portfolio.

Besides, mutual funds allow investors to benefit from professional fund management, transparency in terms of cost and investment universe as well as tax efficiency.

While it is a well known fact that equity investments are essentially for long-term, it is also important to invest on a regular basis. For mutual fund investors, a combination of a lump sum investment as well as investing through SIP can be an ideal during the current market like situation.

If you are one of those investors who are looking to start investing in equity funds but are not sure about how to begin, don't hesitate to take help of a professional advisor. However, even if you decide to have an advisor, you must participate actively in the decision making process. This will make you a better informed and more confident investor over time.

It is also important for you to understand the selection process. The funds should be selected after careful deliberations especially keeping your risk profile, time horizon and investment objectives in mind. You will come across funds that may appear very promising and exciting. It can be really tempting to invest in them. However, you need to learn to say "No" to products you don't really want or need.

One common mistake made by investors during the selection process is to rely on short term performance of funds. Although, past performance has to be an important consideration in the selection process, it's critical that you keep it in perspective. While reviewing a fund's performance, you need to not only look at performance relative to funds with similar objectives over a period of at least 3-5 years but also the risk taken by the fund manager to deliver those returns.

Therefore, you should look for a fund that has had lower volatility. In other words, you should prefer a fund that is managed well and provides consistent returns over those funds that are showing very high past returns but are inconsistent performers over different time periods.

It is also important for you to know what to expect in terms of returns and how to measure the performance. While all of us hope that funds we are invested in do well consistently, in reality there are certain time periods when the fund's performance may slip. While you need not panic every time the market turns volatile, it helps if you are prepared to deal with such a situation.

Last but not the least, if you are a long-term investor, you must be prepared to face volatility from time to time. Remember, fluctuations allow a long term and disciplined investor to benefit from opportunities that a casual investor usually misses out on.

(The author is CEO, Wiseinvest Advisors)