CHAPTER 4 : Adding 'Stability' to the Portfolio in Uncertain Times

In the past few months, BSE SENSEX after reaching a lifetime high of 62,245, witnessed a sharp correction. The fall in the index was not purely led by an increase in the new covid-19 variant ‘Omicron’. Omicron cases started rising exponentially after the last week of Dec 21, on the contrary, BSE SENSEX crossed 60,000 marks in the same period. There was hardly any correlation between Omicron's concern and Market movement.

Along with the Omicron, there is one more risk market is facing right now which is a 'Rate Hike' by the Central Bank. To boost economic activities, Central Banks all over the world lowered the interest rates or used the fiscal stimulus to pump in more money into the system. But as expected this huge money supply has fueled inflation. To curb this, Central Banks will start increasing rates.

The real trouble is, despite the omicron threat and rate revision risk, markets have continued to move upwards with much uncertainty in near future. Apart from these two factors, fundamentally economy is far more robust than last year. With the fear of the USA Fed Rate Hike, we should not forget that the earnings of domestic companies and the consumption story of our economy will not get directly impacted by Fed’s action.

As an Investor, the question is what should be our course of action?

Fact is, we can neither manage the Market uncertainty nor can we keep on changing our asset allocation to the tune of external factors. The best way to sail through this uncertainty is to add stability to the Portfolio.

Below are some of the ideas to keep the portfolio relatively stable.

The first option is to focus on Dynamic Asset Allocation Funds.  Funds in this category can keep equity (unhedged) exposure dynamic. Depending upon market valuations these funds keep their equity exposure between 40% - 60%. Asset Allocation in such schemes entirely depends on the Valuation matrix followed by the Mutual Fund house along with fund manager expertise.

The second option is slightly aggressive than the earlier one. Investors can opt to enter in Aggressive Hybrid Funds. This category being Static strategy unlike the previous one, there will be no change in equity allocation. In very simple terms, out of every Rs. 100 that investor invests, Rs. 65 to Rs. 75 will be invested in Stocks and the remaining portion will generate steady income like FD. Meaning only 65% – 75% of portfolio carries equity risk or equity volatility.

The third option is choosing funds that focus on very large companies. These companies are relatively Stable, Robust, and are actually huge Businesses. This segment is also called Bluechips Stocks. Among all the listed stocks in the market, the top 100 companies form a group of large caps. Typically, large companies have a strong ability to bounce back in case of any unexpected event that occurs in the economy.

Usually, the probability of earning higher returns is directly proportionate to the higher risk component in the portfolio. Over the year, Midcap and Small-cap funds have delivered phenomenal returns. On 14^th Jan 2022 BSE 250SMALL CAP Index has touched the record high of 4247, whereas Largecap BSE SENSEX (30 large companies) is still 1000 points away from its all-time high. Creating a portfolio as per investors' risk appetite is always beneficial than dancing to the tune of the market.

One must always consider options like STP (Systematic Transfer Plan) and SIP (Systematic Investment Plan) to take advantage of market volatility to get better entry points. The economy and Stock market both are very dynamic in nature. Volatility is an inherent attribute of the stock market. Keeping this in mind, investors should stick to asset allocation and take rational decisions based on market valuations.  

 

Note - Opinions and views expressed in the content belong solely to the author, and are for information /study purpose only.