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Amid market volatility, is this the time to rebalance your portfolio?

According to a study by Global Financial Integrity, an estimated $770 billion in black money entered India during 2005-2014, and nearly $165 billion in illicit money exited the country during the same period. Photo: MintPremium
According to a study by Global Financial Integrity, an estimated $770 billion in black money entered India during 2005-2014, and nearly $165 billion in illicit money exited the country during the same period. Photo: Mint

  • As financial markets witness volatility that is much more than a short-term correction, there are numerous reasons for investors to relook at their portfolio & align it with changing realities.

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Amid market volatility and repo rate hikes, it is seen as the right time for investors to reallocate their portfolios, say financial experts. As small cap funds are not too attractive any more, risky assets are a complete no-no and crypto assets – once a darling of the youth – are increasingly becoming a hot potato for the young and old alike.

In the backdrop of all this, investors can explore a number of alternatives such as short-term or liquid and floater funds based on their financial goals and needs in their endeavour to rebalance their portfolio.

Floater funds are the debt mutual funds which invest a minimum of 65 per cent in floating rate securities issued either by the government or by corporates.

"Investors can shift to short-term debt funds once the FD rate hikes by these banks start to peak," said Naveen Kukreja, CEO and co-founder of Paisabazaar in an interview to MintGenie.

These are some of the changes investors can introduce in their portfolio:

Short term debt funds: As consumer inflation has touched 17-month high, bond yields continue to rise, it won’t be long before the RBI raises key interest rates again. So, financial advisors say that investors should consider short-term debt funds.

“Interest rate cycle is on upward trajectory for now. How high will the rates go, shall depend on the inflation rate. Locking in for a longer term right now is not a good idea. So, investors should look at short term deposits or mutual funds before they lock in for a longer term," said Renu Maheshwari, CEO and Principal Advisor of Finscholarz Wealth Managers.

Small cap to large caps: Although small cap funds outperformed their bigger peers in the mid cap and large cap categories last fiscal, the trend is not seen to persist for long.

Small cap mutual fund gave a return of 37.19 percent in the past one year in comparison to 24.46 percent by mid cap and 17.76 percent by the large cap funds, as per ICRA Analytics data. However, when it comes to consistency, small caps are not as stable as their larger peers.

"Globally, due to abundant liquidity, a lot of froth has built up across asset markets leading to sharp rise in prices of equities, cryptocurrencies, NFTs, etc. Financial conditions have started tightening and asset valuations have corrected. If one has to remain invested in equities, large cap funds are better than mid and small cap funds, as larger companies are able to withstand tough times better and generate profits consistently, " says Sandeep Bagla, CEO, TRUST Mutual Fund.

Risky assets: When money is available at lower rates, investors have little worry about the price they paying for a company’s future earnings. Amid abundance of liquidity, investors started to believe that no price or valuation is too high for ‘quality’ companies.

But not anymore! With the cost of money growing, rational investors are expected to look for a higher margin of safety on valuations. As stocks with high PE ratio get de-rated, contra and value funds with lower PE ratio might perform well.

“While a growth strategy may work best for the bull runs or momentum-driven markets, a contra strategy could be most worthwhile in bear phases of markets," Deepali Sen, founder partner of Srujan Financial Services told MintGenie in an interview recently.

 

Follow MintGenie for more such stories. 

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