The Nifty50 index has rebounded around 40% from its 23 March lows. It is still 12% below its January highs, but much of the upmove has happened without any perceptible improvement in the real economy. Financial experts have put the rebound down to central bank liquidity rather than fundamentals. Does this mean investors should take advantage of the jump and move out of equities? Financial planners are divided on this, with most agreeing that this should be done in specific circumstances.
“There is absolutely a case for tactical rebalancing. It is across the board, not just in a few large stocks. The extent of it will vary from investor to investor based on his or her circumstances, but many people entered the covid-19 correction overweight on equities. In my view, things will get worse before they get better," said Shyam Sekhar, founder and chief ideator, iThought Advisory.
However, other financial planners took a more cautious approach to rebalancing. “Valuations look stretched but you should not get in the way of momentum. In any case, debt has extremely low yields and doesn't present an attractive alternative," said Nithin Sasikumar, co-founder, Investography. Planners outlined a few use-cases in which rebalancing should be done.
If your goal nears: Clients whose financial goals such as home buying or children’s education are close by can look to move into debt, said experts. “I'm reducing equity for clients whose goals are close by or who are facing uncertainty in their personal lives, but not for others. Moving out of equity now is basically betting against the central banks, and I certainly wouldn't want to do that," said Sasikumar.
If market moves have altered your goals: “In case of some goals, market movements can actually make them cheaper— such as home buying. In one client's case, the price of a house he wanted to buy in Mumbai dropped sharply post the lockdown. So we did move his money out of equities for this purchase, as a tactical call," said Prateek Pant, co-founder and head products and solutions, Sanctum Wealth Management.
If you are HNI and actively manages portfolio: Investors follow different approaches to their portfolio with some larger investors taking a more tactical approach. Such investors have advisers and find it relatively easy to manage and rebalance their portfolios. "Our internal model suggests lightening our equity positions. We have partially booked profits for our high networth individual (HNI) clients. I think people who fit into this category whose portfolios are actively managed can look at partially moving into cash," said Kirtan Shah, chief financial planner, Sykes and Ray Equities (I) Ltd.
Shah is concerned about valuations but feels that tactical portfolio management should not be attempted by retail investors.
Investors should not try to time the markets. However, they can look to rebalance portfolios in specific situations such as the ones outlined above.