With the benchmark Sensex hitting a new all-time high, is it to time rebalance portfolios?

Indian markets have rallied in the past few months—especially in the mid and small-cap space, led by positive FII flows, robust economic growth versus other emerging market countries, strong earnings outlook,  and private capex cycle expectations.

“Benchmark Indices touched new highs on the back of the sustained increase in capital expenditure by the Government of India coupled with rising manufacturing PMI. Despite an increase in interest rates, we are witnessing rising credit demand and India Inc. today can boast of much better balance sheets than ever before. The return of FIIs to our markets since April has boosted sentiments even as domestic investors continue to repose confidence in Indian equities,” said S Ranganathan, Head of Research at LKP Securities.

Markets touching a new high is a signal that the long term bull market has arrived. ” When such highs occur during macro headwinds and global turmoil, it means that the bull market will sustain and grow stronger. So long as the market climbs a wall of worry, the bull market is on, and investors should load up equities as an asset class,” said  Umesh Kumar Mehta, CIO, SAMCO MF. 

What should investors do? 

Experts suggest  short-term investors can book some profit but long-term investors should use any dips to buy into quality stocks.

“The pace of the rally has slowed  over the last few weeks, but the underlying momentum is still strong. Traders can lighten up their long leveraged positions and book some profit in the immediate term. But medium- to long-term investors must continue to hold on to their positions and use dips to buy more,” said Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities.

Is it time to rebalance portfolios?

While we can’t predict the market, investors can choose an asset mix they are comfortable with. Rebalancing helps to stay closer to your desired asset allocation.

When the markets reach record highs, it is generally prudent to consider rebalancing your mutual fund portfolios to mitigate risk and enhance returns. In the event of an equity market rally, your equity portfolio weightage may have disproportionately increased, necessitating adjustments.

“Sensex has soared about 20% in the last year. However, the interest rates are still near peak. Thus, it is a good time for those who have surpassed their equity allocation due to portfolio appreciation to move some money to fixed-income instruments. For example, in June 2022, if someone had 60% equity, 20% debt, 10% gold and the rest as experimental assets, her equity component might have reached 65-70% now due to appreciation. But, her debt allocation would have been reduced. She can sell a small fraction of her equity mutual funds and invest the proceeds into corporate bonds or long-term bank FDs,” said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.

“To optimize your investment approach, it is advisable to remain invested and employ systematic investment plans (SIPs) and systematic transfer plans (STPs) to facilitate rupee cost averaging. Additionally, accumulating debt securities can serve as a safeguard against potential market downturns. In case of market dips, selectively shifting investments from debt to equity can capitalize on the subsequent opportunities. By maintaining a balanced portfolio and periodically reassessing your asset allocation, you can effectively navigate the current market highs while adhering to sound financial principles,” said Palka Arora Chopra, Director, Master Capital Services Ltd.

The market is high currently because of the consistent fund flows from foreign institutional investors, who are sitting on a huge pile of cash and chasing value stocks. “A small correction can happen anytime and that would be healthy. Overall we are bullish with a longer time horizon. The biggest fear seems to be monsoon at this point in time. The monsoon is very weak till date and EL Nano effect is in the play. This might bring some corrections. Profit booking might also come at these levels,” said Mukesh Kochar, National Head – Wealth at AUM Capital Market.

He believes in such a market, it is wise to  rebalance equity debt allocation. “Due to the recent rally, the weightage of equity allocation increases automatically which we will trim down and add to the debt portfolio to rebalance. This is a regular phenomenon whenever the portfolio is substantially deviated from the original plan due to the return component. At the same time, we are adding some IT dedicated funds as we are finding that valuation is attractive there and risk reward is also in favour,” said Kochar.

Most experts suggest allocating funds towards debt instruments. 

“Investors with short-term liquidity requirements who seek flexibility in retrieving their funds may consider parking their funds in liquid mutual funds or exploring overnight investments within these funds. However, for investors confident in their ability to keep their funds invested for one, two, or three years without the need for immediate withdrawal, bonds and debentures present a viable alternative to debt mutual funds,” said Abhijit Roy, CEO, GoldenPi.

 There are two key reasons for this shift. Firstly, bonds and debentures are now taxed in the same manner as debt mutual funds, as the advantage of indexation for debt mutual funds has been eliminated. Secondly, bonds offer higher returns compared to debt mutual funds and are 100% fixed if held till maturity, devoid of the price fluctuations witnessed in the NAV of mutual funds.

What about SIPs? 

Investors who are saving systematically for their long-term goals should continue doing so without much consideration of where markets are at this point. In the long run, rupee cost averaging will ensure that they earn excellent risk adjusted returns, according to Aniruddha Bose, Chief Business Officer, FinEdge.

 “SIPs not only have to be continued but have to be topped-up, given that price rise (practical inflation prevailing in the market) for consumers is much more than official inflation rate and hence in order to let the savings run faster than the actual price rise (practical inflation), one needs to invest more aggressively and step up their investments in the mutual funds,” said Umesh Kumar Mehta, CIO, SAMCO MF.

Another strategy could be to temporarily de-risk your equity investments in part, but immediately re-start STP’s back into equity funds without fence sitting or attempting to time the market, advises Bose. This can insulate an investor  from any sudden corrections at key market levels.

What should your mutual fund strategy be?

 For long term goals such as retirement, you should invest into high risk/high return funds such as mid-caps and small caps, where you can benefit the most from compounding. For shorter term goals, you should stick with arbitrage funds or liquid funds, said Bose.

Risk tolerances should be assigned to goals (basis their tenor) and not to individuals. “For instance, investing in a fixed income fund for a goal that is 25 years away just because you are risk averse as a person would be a great disservice to the lengthy time horizon, and the opportunity loss would be huge! Educating yourself about risks and taking measured risks is the key to a successful strategy,” said Bose. 

“Investors should definitely increase allocation to fixed-income as the internet rate cycle seems to be at its peak. This is an attractive entry point for locking in longer term yields and also potential capital appreciation on bonds. So instead of going for equity mutual funds, this can be done either via debt mutual funds or direct investments in corporate bonds or SDIs. 

The power of SIPs lies in consistency and prevents the need to predict cycles in the market. Investors should continue to hold onto their existing SIP plans as the long term Indian economy story is firmly in place,” said Nikhil Aggarwal, Founder & CEO at Grip.

“Mutual fund investment is largely for long term investment, and the market fluctuations are transient. This opinion may not agree with short term investors, however, for long term investors all you need to do is keep an eye on the fund house/manager and the fund to see if there is a problem with them. If you are good, market fluctuations should not bother you”, said  Prashant K Goyal, Associate Professor – Finance JAGSoM