Focus on goals, not market levels

By Ravi Samalad |  17-03-21 | 

The market has almost doubled from its March 2020 low. Thanks to a broad-based rally, most sectors have started participating in the rally. As a result, fund categories like infrastructure, value and contra have also generated good returns, especially over the last three months.

While equities have delivered mouth-watering returns since the March 2020 dip, gold is losing sheen and bond yields are rising. In this scenario, how should investors navigate their portfolios? We spoke to a few leading advisers to find what they are advising clients at this juncture.

Saurabh Mittal of Circle Wealth Advisers first draws up a strategic asset allocation for his clients. For the equity portion, he prefers allocating to dynamic asset allocation funds as it does away with the requirement of timing the market or constant rebalancing. “We recommend balanced advantaged or dynamic asset allocation funds for investors who prefer lower volatility and better risk-adjusted returns. These funds rejig the allocation based on pre-determined parameters. If you are a buy and hold investor and your goal is ten years away, then there is no need for looking at technical factors like Price to Equity, or PE, or market levels. The PE went to 42 in the recent past. In the past, the highest PE after the Harshad Mehta episode was 32. If someone who exited at that time, he/she would have missed the rally,” explains Saurabh.

Focus on goals

Rather than monitoring market levels and moving in and out of equities, advisers suggest that investors take action only if their goals are near completion. “We are advising clients to continue to stay invested if their goals are more than ten years away. We are moving from equity to debt if the clients’ goals are visible over the next three years,” says Srikant Matrubai of SriKavi, a Bengaluru-based mutual fund distribution firm.

The importance of goal-based investing.

Keep cash for tactical allocation

Shifali Satsangee of Funds Ve’daa says that given the run-up in markets some of her clients have booked profits by switching to debt funds.

The corrections like the one we witnessed in March 2020 presents a good opportunity to make tactical bets. “It would be an apt time to trim underperforming schemes and keep some amount of dry powder aside for forthcoming market opportunities for tactical calls, after taking into account the risk profile of investors. It would also be in good stead to rebalance the portfolio if the asset allocation has changed significantly because of the present run up. Systematically investing in the market is a good way to take benefits of rupee cost averaging, especially when markets take a downturn or when there are bouts of significant corrections expected,” says Shifali.

Time to enter gold?

Gold had a stellar run in 2020 as investors rushed towards the safety of the yellow metal. With economies starting to show signs of revival, the advent of Covid vaccine, a rising dollar and other factors, gold is losing its sheen. Gold has lost 13.50% in three months. Advisers feel it is a good time to accumulate gold at this level. Gold has a negative corelation with equities, which is why it should form a part of the asset allocation to provide a shield and upside to the portfolio when equities underperform.

Sectoral bets

Two sectors have clearly stood out in this pandemic – technology and healthcare. The category average return of technology funds stands at a whopping 99%, the highest among all categories over a one year period. The healthcare category has been another stellar performer as the world continues to come to terms with the pandemic. The healthcare category has delivered 64% over a one-year period. The infrastructure funds category too has delivered 54% over the same period. While investing in sector funds is fraught with risk, financial advisers say that some portion of money can be allocated to certain sectors where the existing portfolio is underrepresented. “We had already added healthcare to our investor’s portfolios starting 2018 which has certainly paid off well,” says Shifali.

Should you invest lumpsum or stagger?

Some advisers are recommending investors not invest lumpsum at this juncture due to the high valuations. “Observing the current high valuations in the equity markets mainly in the large cap segment, there is very little room to generate superior double digit returns from these levels. Also, the mid and small cap indices have shown good recovery and have started to join the rally. Thus, I am not recommending any of my investors to pour in lumpsum in equities. This is a very good opportunity for investors nearing their goal or who have achieved them to redeem and book profits. The only way investors should participate in this expensive market is via systematic investment plan, or SIP, route in the flexi cap and or focused categories keeping a minimum 5-7 year time horizon,” believes Mumbai-based mutual fund distributor Rushabh Desai.

Navigating the debt space

The central bank slashed interest rates to record low to bring the economy back on track. As a result, the falling yields benefited most debt funds, which yielded double digit returns. While the Reserve Bank of India is still accommodative in its stance, there are expectations that interest rates are unlikely to fall down from here.

Rushab is advising clients to go for short duration funds and invest in high-quality funds in the Corporate Bond and PSU Banking Funds category. “The yields will move higher as we inch towards growth. I recommend investors stick to the shorter end of the yield curve as the longer end will remain volatile. Investors should look at high credit quality funds in Corporate Bond and Banking & PSU categories with an average maturity in the range of 2 to 4 years. Also, investors should consider allocating some portion into in high credit quality floater funds with an average maturity preferably in the range of 1 to 1.5 years, this will help reduce the mark to market hit quite a bit during increasing yields.”

Over a one year period, Banking & PSU category has been the top performer at 7.71%, followed by floating rate funs (7.43%) and Short Duration Funds at 7.17%.

In February 2021, the industry received the bulk of the inflows worth Rs 29,725 crore in liquid, low duration, and money market funds. Categories like medium, medium to long and long duration funds saw outflows worth Rs 1,047 crore. This suggests that investors are moving to the shorter end of the yield curve as bond yields rise. Over a two-month period, categories like medium to long duration and long duration funds have delivered negative -3.05% and -2.82% return, respectively. Barring ultra-short duration, low duration and money market categories, all other categories are in the red over the last two months.

Gilt funds, which invest exclusively in government securities, benefited from declining interest rates. Gilt funds lose when interest rates rise as investors shun old bonds for new bonds which earn higher yield. While gilt funds carry high interest rate risk, they have zero credit risk as they are issued by the government. Over a month period, gilt funds have delivered negative -1 to -2% return. So is it time to move out of gilt funds? Vinod Jain of Jain Investment says that investors should keep adding allocation to gilt funds as it offers the best rate with sovereign guarantee. “At higher rates, investors will accrue higher rates. As gilt funds are invested with three year plus view, rate volatility helps investors to benefit. In the past ten years, rates have fluctuated between 6% to 9%, still long-term annualised return for investors is in excess of 9%.”

Bengaluru-based RIA Basavaraj Tonagatti recommends traditional products like Employee Provident Fund, Voluntary Provident Fund, Public Provident Fund and Sukanya Samriddhi Yojana, or SSY, based on the time horizon and goal. He believes that these products offer tax advantage and better post-tax returns.  “Within mutual fund fixed income space, I’m sticking to short term bond fund categories ranging from liquid to ultra short term funds. I’m avoiding long term bonds and gilts as we have already reached the lowest level of interest rate cycle.”

What are you advising your clients? Share your views.

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