With the Sensex crossing 80,000, equity investors are worried about a correction. Is it time to sell? Find out how to contain risk at this level
With the Sensex crossing the 80,000 mark and Nifty over 24,000, investors are happy that the market has vindicated their faith in equities. The past few months have witnessed a deluge of inflows in equity funds. In the first six months of this year, Rs.3.93 lakh crore has been the net inflow in open-ended mutual funds. In June, SIP inflows crossed Rs.21,000 crore (see graphic).#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} However, this exuberance is worrying many investors, even analysts. They believe the stocks are trading at very high levels and a correction is around the corner. Indeed, all market indices are at their all-time high levels.
However, valuations are not too bloated due to the healthy growth in corporate earnings. “The price-to-earnings (PE) multiples of major indices are at their longterm averages (see graphic),”says Nehal Mota, Co-founder, Finnovate. “If I shut out the noise, then there is no reason to be in a tearing hurry to sell right now.”
In fact, many top companies are expected to report good numbers in the first quarter of 2024-25, which would take the PE figures further down.
Financial advisers insist that investors should not be concerned with the absolute market levels. “Investors should focus on their financial goals. Your financial goals won’t change because the Sensex has fallen below 79,000 or risen above 80,000,” says Vipin Khandelwal, a Sebi-registered investment adviser and Founder, Unovest.
Has your allocation changed?
At the same time, the steep rise in stock prices might have changed the asset allocation of some investors. The BSE 500 has risen around 40% in the past year. If your allocation to equities was 50% a year ago and your investments matched the growth of the BSE 500, your equity exposure would be around 57% now. This assumes that the remaining 50% of the portfolio grew at 7% during the period.
Though a seven percentage point change in the equity exposure is not alarming, it’s always a good idea to periodically rebalance your portfolio. Rebalancing restores the original asset allocation of the portfolio. In the current bull market, that would mean booking partial profits in stocks and reinvesting the proceeds in fixed income. This would reduce the risk and make the portfolio more resilient. “Just like investors need to use their SIPs in a disciplined manner, they also need to follow their asset allocations strictly,” says Rohit Shah, Founder of Getting You Rich.
Rebalancing is recommended because it reduces the risk and delivers more stable returns, which in turn increases the investor confidence in equities. This is especially important for new investors who have just started their journey in the equity markets and have never been through a bear phase. “The average investor is not very informed, so rebalancing becomes a challenge. When the markets go down,many investors end up concluding that equity is not good for them,” says Shah. Only if they get reasonable returns will these investors increase their equity investment in future. When the markets recede, the investors who rebalanced are less likely to panic than those with a high exposure to equities.
Midsummer dream for mutual funds
Rs.60.89 lakh crore was the total AUM of the mutual fund industry in June 2024, 4% higher than in the previous month.Rs.40,600 crore was the total inflow in mutual funds in June 2024.55.12 lakh new SIPs were started in this month, taking the total active SIP accounts to 8.98 crore.Rs.21,262 crore was the total monthly inflow from SIPs in June. The average SIP investment was Rs.2,368.17 NFOs collected RS.15,227 crore in June.
Markets are not overvalued
Major indices are at all-time high levels, but their valuations are at their five-year average.
Note1:“Investors should focus on their goals. Goals won’t change because the Sensex is below 79,000 or above 80,000.”
VIPIN KHANDELWAL
SEBI RIA & FOUNDER, UNOVEST
Note2:“Markets are up but so are corporate earnings. The PE multiples of major indices are at their long-term averages.”
NEHAL MOTA
CO-FOUNDER, FINNOVATE
Note3:“Just like investors need to use SIPs in a disciplined manner, they also need to follow their asset allocations strictly.”
ROHIT SHAH
FOUNDER,GETTING YOU RICH
Can your fund rebalance?
Though this sounds good, the reality is that very few investors actually rebalance their portfolios. Most people continue investing like before because rebalancing the portfolio appears counter-intuitive. The investor is required to sell what is doing well and buy something that is down in the dumps. Very few investors want to cut exposure to an asset class that is making new highs every week. However, markets do not move in a straight line and disappointment sets in when stocks decline.
The investors who want to avoid this should consider investing in balanced advantage funds. These funds follow a dynamic asset allocation and adjust the equity exposure to market conditions. The proprietary models that govern balanced advantage schemes vary across fund houses, but the broad rule is the same: reduce equity exposure as markets go up and increase it when prices decline. So, these funds book profits when markets are zooming and shift back to stocks when markets are down. Letting the fund manage your asset allocation is a good idea because it prevents the investor from getting greedy or fearful. They buy when others sigh, and sell when others yell.
Financial advisers argue that while balanced advantage funds change the asset allocation as per the market conditions, they can’t accurately match the asset allocation of the individual. The asset allocation requirement of every individual is different and a ‘one size fits all’ approach does not work here.
Also, while these funds promise lower volatility, it comes at the cost of returns. In the past five years, the balanced advantage category has given annualised returns of 13.35%, compared to 16.65% returns delivered by aggressive hybrid funds, and 19.5% by the flexi-cap diversified equity category.
What is your asset allocation?
The first step in rebalancing your portfolio is to know the allocation to various asset classes. Calculating the asset allocation is not easy, though. It must take a holistic view of the portfolio and also factor in the incremental investments by way of SIPs and other monthly contributions. The average investor may not be able to correctly size up his asset allocation and professional help is recommended. “This is why individuals should initially work with an investment adviser and understand how to assess their allocation,” says Khandelwal.
If your exposure to equities has breached your comfort level, it’s time to sell some of your mutual funds or stocks to bring it down. For those who invest through monthly SIPs, rebalancing would just mean no more investments in equities and directing the amount towards fixed income instruments. For others, it would require some profit booking in stocks and gold, and reinvestment of the proceeds in fixed income options.
How often must you rebalance?
Experts say rebalancing should be done once in 1-2 years to restore the desired asset allocation. However, they also say that rebalancing is required only if the allocation to an asset class has changed by more than 10 percentage points. If you rebalanced last year, you may not really need to do anything now. However, if you have not reviewed your portfolio in a while, it may be time to assess the asset mix and make appropriate changes.
If you want to know how to manage your asset allocation, take a leaf out of the NPS, where three lifecycle funds continuously change the asset mix every year. The equity exposure is linked to the investor’s age and investments are automatically rebalanced every year on his birthday. The Aggressive Lifecycle fund starts with 75% in equity funds and reduces the exposure by 1% every year after the investor turns 35. There is also a Balanced Lifecycle Fund (50% in stocks) and a Conservative Lifecycle Fund (25% in stocks).
“Lifecycle funds suit investors who don’t have the time or knowledge to decide their asset allocation,” says Rahul Bhagat, CEO of DSP Pension Fund. These funds are the only true asset allocation product customised to the individual. It may not be possible for investors to fully replicate their sophisticated strategy, but it does give a broad idea of how to manage the asset mix of your portfolio.
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This story originally appeared on: India Times - Author:Faqs of Insurances
