As Samvat 2074 comes to a close, it’s time to take stock of your portfolio. It may also be a time to consider a portfolio rejig. Here is the Part I of the article where we talk of how your portfolio allocation should be in Samvat 2075. In Part II, we will address the top equity mutual funds you could look at investing in the new year.
While your risk appetite and profile would decide how your portfolio would look like in Samvat 2075, it is important that a diversified portfolio of various assets will substantially improve the risk-reward for investors in the new Samvat.
It also depends on how you want to look at this. This Samvat, i.e. 2075, is going to be markedly different due to the political risks that exist. There is general elections next year.
Equities – The Diwali sale of stocks has begun sometime back, and the market offers a wide range of choice for the investors. Several stocks are trading at 52-week lows and some are at even 4, 5-year low. Do remember that the next 12 months will be quite challenging marked by uncertain political events and evolving macroeconomic scenario.
The harsh truth as we begin Samvat 2075 is that the market is unlikely to see any significant re-rating from the current levels and valuation multiples. Such market conditions provide great opportunity to accumulate high-quality stocks at reasonable valuations. So, instead of going for the index as a whole or a lot of stocks, stick to good quality and large firms.
In the face of volatility, there will always be a flight to quality. This is the consensus trade that happens. So, be conscious of the value presented in the stocks. We assign 30% weight to stocks in Samvat 2075. Don’t stray outside the top 100 stocks even if there is a need to do so. You can also play equities through large-cap mutual funds. In that case, you can hike the equity exposure to a maximum of 40% this Samvat. Why 10% more leeway? This is because MF equity portfolios will already have selected a curated set of top stocks.
Debt MFs/bank FDs – Fixed income asset class is an integral part of an investor portfolio. This Samvat fixed income may show you the true nature of fixed income. Current credit event at IL&FS and liquidity concerns at NBFC / HFCs have brought debt funds in the spotlight. So, the advice will be to stick to liquid funds with highest credit quality only.
Fixed income is all about safety, liquidity and return. Today, the current high yields available on good quality credits offers an attractive risk-reward trade off, but one year i.e. till the next Samvat is a short time. So, stick to 1-year debt MFs. Bank FDs are an automatic choice for most. Liquid funds have also shown some volatility in the past few months. If you want zero volatility and guaranteed returns, stick to bank FDs only.
We assign a weight of 40% to liquid MFs and bank FDs for this Samvat. Such high exposure to debt will provide a great cushion in case equity markets continue to play truant. Discerning investors can also increase allocation if they feel so.
Gold & Cash – Depending on your gold affinity, allow the precious metal asset to act as a hedge in the current financial situation.
Globally as well as domestically, the world continues to remain in a state of great disequilibrium. There are global economic risks and also geopolitical worries. Given the macroeconomic picture, gold will be a useful portfolio diversification tool in Samvat 2075. It will also help you to reduce overall portfolio risk.
But how much should you assign to gold? We have assigned 30-40% to equity and 40% to debt/bank FDs. This leaves us with 10-20%. So, allocate 10% of funds to gold in Samvat 2075. In case both equity and debt markets are in doldrums, the 10% allocation to gold will help steady the ship in a great way.
Cash is also an important allocation in this Samvat. It is a tactical asset that should be used to increase exposure when there is a big correction in equities. A 10% cash exposure or keeping 10% of your investible surplus in cash this year. Gold has to be invested. Cash will remain idle. Do not deploy 10% cash at one go when correction happens. Use it in tranches.
The general sense is that the current stock market scenario will be of diminishing returns. Hence, we prefer large-caps in stocks, top quality liquid MFs/bank FDs and a combination of gold & cash this year. By keeping money in liquid funds, you can withdraw them very quickly and use the funds for deployment in case equities really become cheap.
Do remember that cash has to be invested in a staggered manner. Investors would have to make tough choices going forward, but at RupeeIQ we believe having a blueprint at the start of the year is very important.