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Is it time to revisit equity portfolios?


The reasons behind the recent rally have been a growth-oriented Budget, recovery in the economy as well as businesses, effectiveness of vaccines against the covid-19 infection and the foreign fund inflows into Indian equity markets.

The recent rally has pushed the BSE Sensex’s trailing price-to-equity (PE) level to the 36 mark.

“I don’t think the markets are pricey. Of course, on the valuations front, it looks stretched, but we need to re-look into the benchmark PE level. Historically, PE of around 18 to 20 level is considered as a historical average. It is probably time to raise this benchmark,” said Harshad Chetanwala, a Sebi-registered investment adviser and co-founder of MyWealthGrowth.

Still, there is a debate on whether equity investors should consider the markets as expensively valued and apply a brake on their investments.

If you are an investor starting into mutual funds or you are someone who is close to retirement, here’s a look at where you should place yourself in terms of asset allocation.

As a basic rule of thumb, financial planners say that long-term investors shouldn’t mind the Sensex levels. However, some experts are of the view that with the Sensex at 52,000, it would be wise for investors to deploy a strategy that helps protect them in case of a major correction in the short term.

Nishith Baldevdas, founder of Shree Financial and a Sebi-registered investment adviser, is advising a dynamic asset allocation strategy to his clients.

“The market is expensive at the 52,000 level, and it was expensive at the 42,000 level itself. This asset allocation funds itself will have an automated strategy, so it will protect the downside. The idea is that in an expensive market, it is always better if you fall less,” said Baldevdas.

According to ratings agency Crisil, risk-mitigating hybrid fund categories saw inflows in January, after witnessing net outflows for six straight months. The hybrid schemes saw net inflows of 2,142 crore in January.

The main contributors to the change in the overall fund flow trend amid the underlying market volatility were the arbitrage and the dynamic asset allocation categories, which recorded net inflows of 5,235 crore and 658 crore, respectively.

Arbitrage funds work on the mispricing of equity shares in the spot and futures market, while in a dynamic asset allocation fund, an investor depends upon the fund manager’s expertise to make changes in line with economic and market situations.

However, according to financial experts, people whose goals are due in the next two-three years must already be out of equities.

“If anyone is about to retire, it is time to start systematic withdrawal plans (SWPs). Let’s say your retirement is almost two years down the line, the best strategy is to start de-risking your equity exposure as the market is at higher levels,” said Chetanwala, who feels the market is unlikely to correct in a massive manner.

For example, if you have a retirement corpus of 5 crore, start withdrawing 20 lakh every month till the time of the retirement, which is in two years. “Doing so, one remains invested in the market and it also de-risks his or her portfolio,” he added. It is advised that people, who are near retirement, should have a strategy where at least three years of liquidity is sufficiently managed.

Moreover, people whose goals are due in the next two-three years should also stay out of equities at this juncture.

Given the elevated index levels, for a new investor with a long-term horizon, the strategy should be to avoid lump-sum investments. For a first-time investor with a 100 investible sum for equity allocation, Chetanwala advises that he or she can park around 20-30 right now and the rest can go for monthly investments.

Moreover, new investors should only look at large-cap and index funds to begin with. There have been instances where investors burned their hands because they started off with the high-risk instruments. Keep in mind that mid-cap and small-cap funds have the tendency to give higher returns, but at the same time the risk is also high.

New investors must at best can stretch to a large and mid-cap fund, if they a high-risk appetite or a much longer time horizon.

Mint view

“The 52,000 level is just a number and if a person has a 10-15-year tenure, the Sensex would be beyond 100,000 at some point,” said Suresh Sadagopan, founder, Ladder 7 Financial Advisories, a Sebi-registered investment adviser.

Financial planners advise that investors must do a basic asset rebalancing at least every six months in spite of the Sensex levels. “In case if it is absolutely necessary, then also rebalance the portfolio by cashing out equity and putting it in debt as well,” said Sadagopan.

Remember that goals are meant to be achieved irrespective of the index levels, and investors must focus on their goals rather than the Sensex.

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