Sensex rebounds 31%, but why are many investors stuck with low returns?4 min read . Updated: 05 Jun 2020, 10:52 AM IST
- Although there are worries over this sharp pullback, this rally has brought some respite to investors who saw a much sharper correction of around 50% in a month’s time during February-March.
The S&P BSE Sensex has gained around 3,500 points or 11% in the past six trading sessions. Since 23 March, the index has recovered around 31% as of 3 June 2020. Broader market index Nifty50 has shown similar recovery and has delivered a return of around 32% since 23 March.
The rally is broad-based this time with Nifty 500 delivering similar returns. Although there are worries over this sharp pullback, this rally has certainly brought some respite to investors who saw a much sharper correction of around 50% in a month’s time during February-March.
However, there are many investors on Dalal Street who haven’t seen similar returns in their portfolio. Should they be worried? Although it is too short a period but let’s understand the factors that could have lead to the difference in your portfolio returns and the overall market.
THE ASSET MIX
The returns of a portfolio depend on what assets you are invested in and in what proportion you are invested in equities or debt or gold if any. The higher the exposure to equities, there is a higher probability of returns being inline with the market. “Typically the returns will also depend on the asset rebalancing done over time," said Vishal Dhawan, founder, Plan Ahead Wealth Advisors, a Sebi-register investment adviser.
“Many investors may have moved to cash or fixed deposits due to the fears prevailing in the market in March. So, those who would have exited or trimmed their equity exposure at that point of time may not benefit from the current market rally," said Dhawan.
“This is the perpetual investor behaviour, which leads them to exit equity when they are doing badly despite the fact their attractiveness goes up in terms of valuations after correction, but investors make a decision out of fear," said Saurabh Bansal, founder of Finatwork Wealth Services.
So, if the cash holding in the portfolio is higher or the investment in debt is higher, the returns are unlikely to be in line with the market recovery.
“Some investors who wanted to invest may be doing it through systematic investment plans (SIPs) or systematic transfer plans (STPs) following a conservative approach and may not be fully invested in equities right now and will also witness lower returns," added Dhawan.
UNDERLYING EQUITY PORTFOLIO
You can compare the overall equity portfolio returns with that of the market, but here also, your portfolio returns could differ from the overall market returns due to various reasons.
Investment period: One of them being the entry point or period of investment. The above returns mentioned of the equity indices are point to point returns, so if you entered the markets in March when the market hit the bottom, then you would see similar returns, but if you had invested before or after, your returns will differ. “It is difficult for an investor to catch that bottom of the market," said Bansal.
"The returns will have an impact in terms of when the investor started and the strategy deployed—lumpsum, SIP/STP or staggered in different manners," said Dhawan.
Funds you are invested in: Different funds follow a different strategy and in line with that strategy their portfolio returns differ from benchmark as well as peers. Therefore, an investor’s returns will depend on which funds he or she is invested in and the strategy followed by that fund manager.
“Every fund has a different investment mandate and are run with varied investment styles. One of the major reasons for the fund to underperform could be that the investment style with which it is run could be out of favour. We have seen that in the case of funds, which are managed with a valuation conscious style. Since for some time now the market has been largely driven by growth stocks, valuation conscious investment approach has been out of favour leading such funds to underperform their benchmark indexes," said Himanshu Srivastava, senior analyst manager research, Morningstar India.
Another reason could be “If a fund has an underweight position in a sector, which performs well, then this will result in the fund’s relative underperformance vis-à-vis the benchmark index," said Srivastava.
So, if you have direct exposure to stocks, your portfolio returns will also get impacted by the returns of the stocks and sectors you have exposure to.
WHAT SHOULD YOU DO?
Despite the rally being broad-based experts are very cautious. “I am cautious about the current market rally as the economic data and corporate data is going to be extremely week given the lockdown," said Srinivasa Rao, CIO, PGIM India Mutual Fund.
“I don’t see the reason why the market is so much excited when the economic data is weak and on the virus front, we are seeing a sharp rise in numbers on a daily basis. There is no fundamental reason for such a sharp recovery in the market. The current rally is majorly driven by liquidity and hopes that normalcy may return as economic activities resumes and lockdowns are lifted," Rao added.
However, if you are a long-term investor you shouldn’t be worried about short-term bouts of underperformance in your portfolio.
“Investors should avoid putting money in one shot as they might think they might have missed the rally," said Dhawan.
Investors should stick to their asset allocation and invest in line with their goals and when they need the money. Investors should also rebalance their portfolio regularly.