Ideal portfolio for challenging times

Rising interest rates and record breaking equity market spur investors to reconsider their options

Ideal portfolio for challenging times
Ideal portfolio for challenging times

Smart money is moving away from small-cap and mid-cap to large caps, a trend which is visible for quite some time now with the rise in Sensex and Nifty and while the market in general witnesses volatility.

With rising interest rate for fixed deposits announced both by large public sector banks and private banks, another shift is likely from equity to fixed income products.

As the equity market benchmarks are creating fresh new highs, there is growing concern among the investors and financial market experts that the market may be close to peaking as sobriety may prevail before the next general elections.

What should be the ideal portfolio in such a situation.

“A lot depends on one’s situation in life, number of years to retirement, liquidity and regular income needs, risk appetite, taxation and such. Hence, one advice will not fit all,” says Suresh Sadagopan, founder, Ladder7 Financial Advisories.

“With interest rates rising and markets scaling new highs, investors need to relook at their portfolios and make changes in them so that they can face the challenging times going ahead,” says Rahul Mantri, chief financial planner, Midas Touch, a Pune-based financial adviser.

Price correction

Those betting long term on equity, however, have nothing to fear and they can keep adding to their portfolio as there is a fair price correction due to prevailing volatility in the market, feel experts. 

Atul Kumar, head – equity, Quantum AMC in a note said, “Barring a few sectors, valuations of stocks are at high levels. While share prices have run up, earning of companies are picking up now after a four-year hiatus. High level of liquidity globally has driven up stock prices. With Lok Sabha elections due next year, stock markets could be spooked by political uncertainty.”

“Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many nations. Investors can expect decent return from equities over a long period in future. Valuations, however, leave moderate upside in the near term. Investors at this point should continue to invest in equities through SIPs,” Kumar said.

While equity market surged at the cost of fixed income, real estate and gold, there is some revival of interest in real estate buying with smart money moving to PMS products that offer real estate upside through their portfolio mix.

Rajesh Iyer, chief executive officer, DHFL Pramerica Asset Management Company on recent real estate investments trend said, “Private equity and debt investment in real estate in the first quarter is estimated to be $2.6 billion, highest for the last eleven quarters. We believe it is a start of mega trend and it will catch momentum as we see more clarity emerge around R.E.I.Ts’. Commercial real estate is recovering as rentals are moving up in most parts of the country. The unsold inventory in residential is slowly getting exhausted.”

“Smart money is betting on this opportunity of growth over the next decade. We have been early movers to spot this trend and have participated through exposure in our PMS offerings. RERA and GST have resulted in two big structural changes as transparency standards have just seen a big improvement and the change in cash

flow structure is extremely capital intensive and will drive out fringe players,” Iyer said.

Equity investment is still advised given the right kind of stock one invests as Iyer said, "Equity markets are witnessing the tug of war between worsening macros and improving micros. Investors should use opportunities provided by the market to add exposure to quality oriented portfolios.”

On the fixed income side besides fixed deposits which are still offering rates much below what it used to be five years back, investments in debt mutual funds are being advised in funds which invests in shorter maturity papers. 

“Our conviction on fixed income continues to be on the short term and accrual funds. Asset allocation remains the key,” Iyer of DHFL Paramerica AMC added.

Big concern

The big concern for the equity market here onwards, as Sensex and Nifty sit on a new peak every day is lack of fund flows from the institutional investors, be it the mutual funds or the foreign portfolio investors.

Indranil Sen Gupta, economist, Bank of America Merrill Lynch says, “It seems unlikely that FPI flows will revive in the near future given the headwinds. FPI equity flows should

slow with possible entry of China paper into benchmark indices. This could push up to $100 bn into the China markets by end-2019. Also any escalation of the US-Sino trade war will also hurt FPI flows and FPI equity flows should also slow on political uncertainty in the run up to the general elections, given rich valuations.”

The domestic flows in the equity mutual funds have also been slowing down as evident from July data released by Association of Mutual Funds in India.

Domestic savers continue to reduce their fresh allocations to mutual funds, the latest monthly data released by Association of Mutual Funds in India (AMFI) for the month of July showed.

Inflows in equity funds of the mutual fund industry fell further in July as per monthly data released by Association of Mutual Funds in India.

Inflows to equity mutual funds and equity linked savings scheme (ELSS) slumped to to Rs 9,452 crore in July from Rs 9,660 crore in June and Rs 11,350 crore in May 2018. Even debt mutual funds saw outflows as per the latest AMFI data with outflow of Rs 31,141 crore from liquid/money market fund compared to Rs 52,104 crore inflow in June and outflow of Rs 7,950 crore from income fund as against Rs 23,119 crore outflow in June.