At this point of time last year, equity markets
were rising while interest rates
were headed downward. Now the situation has reversed on both counts. If you plan to review your portfolio before the financial year ends, make suitable changes to it so that it can cope with these changes.
Equities: Large-cap funds
have given a category average return of 11.94 per cent over the past year. Keep 60-70 per cent of your equity portfolio in large-cap funds
as they have the ability to weather volatility better. Says Sailesh Raj Bhan, deputy chief investment officer (CIO), Reliance Mutual Fund: “Valuations of large-cap stocks are more attractive than those of mid- and small-cap companies. The earnings scenario for the broader market is also likely to be better this year than last. The low base of the previous year will support the earnings recovery. Hence, larger-cap companies offer better risk-reward versus other sub-segments of the market.” He adds that large-cap companies have substantial operating leverage built in, and will benefit from the broader economic recovery, as has been already witnessed in the third quarter results. The recent market correction has also made them more attractive from a three-year timeframe.
Mid- and small-cap funds have given a category average return of 18.72 per cent over the past year. In the recent market correction, they declined more than large caps. Nonetheless, maintain a 30-40 per cent allocation to them in your portfolio, as they could register faster earnings growth. “Compared to a 17 per cent compounded annual growth rate (CAGR) for large-cap earnings, mid-and small cap earnings
could grow at a CAGR of 22 per cent over the next couple of years,” says S Krishnakumar, CIO-equity, Sundaram Mutual. He adds that since the mid- and small-cap space is larger, fund managers have greater choice of stocks and bottom-up stock picking pays off more in this space.
Rising interest rates
have affected the returns of longer duration funds. The bulk of your debt fund portfolio should be held in ultra-short-term and short-term funds, while only around 25 per cent should be in longer-term bond funds (chiefly, dynamic bond funds) within longer-term portfolios.
Fixed deposit (FDs) rates have also been revised upward. Invest only in six- or nine-month FDs so that you can roll over to higher rates (assuming that interest rates
continue to rise). Those in the 20 and 30 per cent tax brackets should consider other debt instruments such as 7.75 per cent GoI bond, tax-free bonds available in the secondary markets, and debt mutual funds.
Real estate: The residential sector continues to be in correction mode. Launches have declined at a CAGR of 18 per cent since 2014 across the seven major cities, according to data from JLL India. “More units have been sold than launched in the past 24 months in the high-volume markets of Delhi-NCR, Mumbai and Bengaluru. Capital values have remained largely steady over this period. Developers are currently focusing more on finishing and delivering their projects and sticking to their project timelines,” says Ramesh Nair, CEO and country head, JLL India. He expects sales volumes to rise in 2018-19. Make your purchase before that happens, as developers will stop offering discounts and favourable payment plans once sales pick up.
Gold: The yellow metal has turned in a middling performance of 6.61 per cent over the past year. One factor that could affect the price of gold positively is a trade war between the US and others nations. At present, central banks across the world hold a substantial portion of their reserves in dollars. “If trade patterns of countries shift away from the US, their central banks will reduce dollar holdings. At the same time, if they are reluctant to hold large quantities of other currencies, they could increase allocation to gold,” says Chirag Mehta, senior fund manager-alternative investments, Quantum Asset Management Company.
Currently, the US central bank is talking of four rate hikes while the European Central Bank
is considering rolling back its quantitative easing (QE) programme. “A tighter monetary policy could affect asset markets and economies adversely. If central banks once again have to resort to unconventional monetary policies, that would be positive for gold,” says Mehta. Finally, if inflation in the US rises faster than expected and the central bank falls behind the curve, that too would be positive for gold.
Gold is not, however, expected to do well in the near term when central banks are speaking of stronger economic growth and rate hikes (positive real interest rates
are unfavourable for gold). Maintain a 10-15 per cent allocation to the yellow metal, nonetheless, as this reduces portfolio risk.
What should you do? Equity markets
have corrected by 9.06 per cent from their recent peak of January 29. According to Arvind A Rao, financial planner and founder, Arvind Rao and Associates, “More than the macro environment, focus on your financial goals. As long as long-term money is allocated for long-term goals, you need not make any changes to your portfolio. Tinkering with long-term investments
due to short-term changes in the environment would be a mistake.”
Selling off your equity funds before March 31 and buying them back after April 1, to take advantage of the zero LTCG tax regime, will also be a futile exercise. “Prices up to January 31 are already grandfathered, and the market has declined since then,” says financial planner Pankaaj Maalde.
During the review, if you find that your asset allocation
has deviated significantly from its original level, sell the outperforming asset class and invest the money in underperforming asset classes. For this purpose, make use of the March 31 deadline. Also, check your portfolio for underperforming funds.
Put them on your watch list and give them at least three quarters to turn around. If they do not, sell them. “In any portfolio where you are less than three years away from your goal, start shifting money from equities to debt,” says Maalde. However, when exiting an investment, you should try to minimise the impact of exit load.