Six vaccines for your portfolio | India News

The second wave of Covid infections is looking more dangerous than what the country witnessed in 2020. More than two lakh cases are being reported daily and more than 4,000 people are succumbing to the disease every day. To make matters worse, there’s a shortage of vaccines in the country. With markets fluctuating widely, what should investors do? We bring to you six steps investors should take to safeguard their equity portfolios. These strategies are the vaccines that can possibly immunise your portfolio against a sharp downturn. Like any vaccine, each strategy has a price, a certain degree of efficacy and also some unavoidable side effects.For instance, if you sell off your stocks and exit the market completely, it will give 100% immunity. But if the market moves up, your portfolio will suffer an opportunity loss.Another effective safeguard is the use of put options to hedge the portfolio. The put option will gain if markets crash, which can offset the losses suffered on stocks and funds. But hedging is costly and needs to be done every month. Only investors who understand Futures & Options (F&O) should do this.A small investor’s best bet is to combinedly use 3-4 of these six strategies. It will cushion his portfolio against a deep loss in a market crash. medium nocaption82734964This is the most effective vaccine against a market crash. Just sell off your stocks and funds and exit the market completely. This strategy does not cost anything upfront and has 100% efficacy against a market downturn.But exiting equities completely will upset your asset allocation and skew the portfolio. The bigger problem is the opportunity loss you will suffer if the markets don’t crash but move up. We saw that happen last year when the markets crashed in March. Many investors got jittery and sold off their stocks and equity funds, only to regret their decision when markets recovered and moved on to hit a new high by the end of the year. medium nocaption82736117Exiting has other side effects too. You will be saddled with short-term capital gains if the securities being sold were held for less than a year. That’s 15% shaved off from the gains made on the transaction. In case of equity and hybrid mutual funds, there may even be an exit load if you sell before 12 months. Even if the investments were made more than a year ago, be mindful of the tax on long-term capital gains. You will have to shell out 10% tax on the long-term capital gains beyond Rs 1 lakh. Instead of a complete exit, a better option would be to book partial profits by selling off some portion of the equity portfolio. The start of the new financial year is an opportune time to review your stocks and fund portfolio. Focus on good quality stocks with strong fundamentals and mutual fund schemes that offer stable returns. Your portfolio will be less vulnerable if you weed out momentum stocks and laggard schemes. medium nocaption82736101Another way to de-risk the portfolio is through diversification. The diversification principle is best served by mutual funds, which spread the risk across a basket of stocks, sectors and market segments.A concentrated portfolio with a few stocks is obviously riskier than a diversified portfolio, so one can consider moving from individual stocks to an equity fund.Investors can also diversify geographically by investing outside India. An added benefit of investing in foreign stocks is that a depreciating rupee actually works to your advantage. One of the guiding principles of diversification is that investment in non correlated assets reduces the risk significantly. Therefore, experts suggest that investors should go for developed markets like the US because the risk profile of other emerging markets will be similar to that of India. “In addition to the lack of correlation with Indian stock market, the ability of the US markets to bounce back after a crash is also higher,” says Viraj Nanda, CEO of Globalise, a platform for global investing.Incidentally, you can invest in US stocks by buying US-focused mutual funds and ETFs linked to US indices. “The US investments complement Indian markets. In the US, you get to play great themes and stocks like Apple, Google, Amazon, etc, which are not available in India,” says Ankur Maheshwari, CEO, Equirus Wealth Management. These companies are poised to change the way the world works in the coming decades and are, therefore, good long-term bets that will provide a significant upside while protecting the downside. medium nocaption82736173You can also reduce risk by diversifying across asset classes like debt and gold. If you are underweight on gold, it makes sense to add now because gold prices will not be impacted by India specific problems. “Since growth is coming back in countries like US and China, gold may not go back to its previous peak of $2,072. However, the rupee may get hit if the Covid situation goes out of hand. Being an international commodity, gold will gain,” says Harish V, Head of Commodities Research, Geojit Financial Services. medium nocaption82734991Rebalancing is another name for booking partial profits. We all know that the performance of different asset classes varies across time and an investor should periodically make changes in the portfolio to restore the original asset allocation. This will not completely secure the portfolio against a market decline, but rebalancing would cushion the impact to some extent.Experts say rebalancing should be carried out at the end of a calendar or financial year. Backtesting studies have shown that rebalancing delivers better returns in the long run than static portfolios that don’t make any changes. More importantly, rebalancing lowers the volatility of returns, which helps boost investor’s confidence. When markets crash, investors with rebalanced portfolios are less likely to panic and more likely to remain invested.In a way, rebalancing ensures that you buy low and sell high, that too in a methodical way. “By following this rule, you also eliminate any emotional bias that makes you do the opposite,” says Dhirendra Kumar, CEO of Value Research. But even though it is a prudent decision, rebalancing is easier said than done. “The decision is not easy because it means taking a contrarian view. You have to get rid of assets that have done well and invest in underperforming assets,” says Raj Khosla, Managing Director of MyMoneyMantra.com. 82737013For some investors, especially those who invest through monthly SIPs, rebalancing would just mean no more investments in equities and directing the amount towards fixed income instruments. But for most others, it would require some profit booking in stocks and gold and reinvestment of the proceeds in fixed income options.If you are going to rebalance your portfolio, how much should be in equities? “The mix of equity and debt should be governed by the individual’s risk appetite. It should depend on how comfortable the person is with the ups and downs of the market,” says Dhirendra Kumar of Value Research. medium nocaption82735018With lockdowns being imposed in several parts of the country, demand may suffer and businesses could feel the heat again. The high earnings growth projections that have been baked into share valuations will be revisited and prices will adjust to the reality. Until recently, market preferences had shifted away from so-called quality stocks to cyclical names. However, the last month has already seen a reversal in trend. Defensives made a strong comeback as the second wave of Covid-19 virus took on bigger proportions. Technology, pharma and consumer staples stocks are again back in favour. medium nocaption82736368Meanwhile, the looming spectre of fresh curbs is a dampener for prospects of consumer discretionary, infrastructure and construction stocks.Experts reckon it may be a good idea to temporarily shore up presence in defensives. “Going forward outperformance will come from ‘low beta’ and defensives like IT, pharma and FMCG, with IT leading the pack,” says Kunj Bansal, CIO, Karvy Capital. In bad times, it is typically seen that businesses with inherent strength are able to sail through. Better run companies will be able to withstand the turbulence and bounce back quickly. It makes sense to stick with proven businesses in such an environment. 82737087However, investors should not get overly cautious and dump cyclicals. Analysts maintain the overarching narrative remains in favour of continuing economic recovery. Vikas Gupta, CEO and Chief Investment Strategist, Omniscience Capital reckons uncertainty is much tempered this time. “In this round of lockdowns, the uncertainty is lesser as the ongoing vaccination drive gives the second wave a predictable timeline to subside. So overall economic impact is significantly boxed compared to last time.” With recovery not likely to be dented, cyclicals should regain vitality. Even so, do not be adventurous and bet on relatively unknown businesses at this juncture. medium nocaption82735037Savvy investors who are familiar with futures and derivatives can hedge their portfolios using put options. You can buy put options of individual stocks (if you have a concentrated portfolio) or of the Nifty (if your stock portfolio is diversified or if you are holding equities through mutual funds). There is another advantage of using Nifty options now. “The cost of options will be a shade higher in individual stocks during the results season. However, results season is spread out for its constituents and therefore, this impact will be minimal for Nifty,” says Sacchidanand Uttekar, Deputy VP, Trade Bulls Securities.Put options gain when stock prices go down so the buyer is hedged against a crash. “Despite the immediate bounce, weakness is persisting in the market. We feel the market is heading lower on a month on month basis,” says Miraj Vora, Senior Manager, IDBI Capital Markets & Securities.Thrilled at the prospects of protecting downside and also keeping the upside? Hedging is a costly vaccine, and has to be taken every month. It also doesn’t have an impact unless the markets suffer a deep cut. In our example, the investor has bought Nifty puts expiring on 27 May. If markets remain above 14,000 levels, the puts will expire at zero value. Even in case of a deep cut to 13,000 the put will only reduce the loss for the investor, not completely cover it. medium nocaption82737779 medium nocaption82736860Some people also use futures contracts as hedging tools. Strictly speaking, selling a futures contract amounts to partial profit booking and not hedging. Also, the investor has to pay a heavy margin for the contract.The upside is that futures contracts can be rolled over to the next month. Futures usually trade higher than the prevailing Nifty level. For the seller, the higher premium paid by the buyer takes care of the brokerage costs. medium nocaption82735044Even when your immediate priority is safeguarding your portfolio, don’t stop thinking ahead. If the market slide deepens, opportunities for investing will abound. At some point, you should consider making a staggered entry. Amol Joshi, Founder, PlanRupee Investment Services, says, “If elevated market levels in the recent past stopped you from investing money, you can start deploying in a staggered manner now.”However, to do this, you must have investible surplus in hand. Otherwise you would be left struggling to arrange funds when the time is ripe. Identify that part of your portfolio that can be liquidated to give you the necessary arsenal when required. For instance, some existing debt funds or fixed income investments can be used to provide the cash. Arun Kumar, Head – Research, FundsIndia says investors should demarcate a portion of debt allocation as the ‘Opportunity Bucket’ to be deployed in equities when the market corrects to a certain extent.Once you have the ammunition ready, chart out a roadmap for when and how to fire it. Experts urge investors to stay nimble. Apart from ongoing SIP commitments, you should put in lump sums in a phased manner on further cuts. You should target deploying fixed tranches of money at every stage of market correction. For instance, you may invest 20% of the surplus when the market corrects 10% from a recent high. Another 30-40% can be deployed if the correction extends to 20%. The remaining amount can be invested in case of steeper cuts. If you are unsure about deploying manually at market declines, consider initiating a STP from a debt fund into an equity fund over the next 6-12 months. medium nocaption82736820Do not wait on the sidelines as the market correction to play out. Many tend to get cold feet when a correction is underway. Even when the market recovers, they hesitate to get back on the saddle. It is only after the market recovers fully that investors realise they missed the bus. Longer you remain on the sidelines, further behind you find yourself when the market recovers.