Where should you reallocate funds if you intend to sell a part of your portfolio ahead of market correction?
If you speculate the market to correct marginally or significantly in the near future, you can keep a portion of the portfolio in cash. We explore what are the likely scenarios and the right course of action that ought to follow
Some investors and traders speculate a correction is around the corner since a liquidity-driven market rally may have run its course. Also, the Federal Reserve is set to shutter its pandemic era bond-buying programme towards the end of the year, which might lead to sell-offs by institutional investors.
It can be seen as an opportune time to book profits, especially by investors who have a financial goal lined up in the near future.
Those who will require money after a long time can naturally afford to wait and watch for the time being. Some experts believe that the market fall, if at all, would be marginal and not substantial.
“The market has a nature to oscillate. Even a long bull run experiences a lot of minor shocks. Various factors justify recent market euphoria such as commodities run-up, lower interest rates, and government reforms,” said Ankur Kapur, CFA, a SEBI-registered investment advisor.
At the same time, Chokkalingam G, Founder, Equinomics Research and Advisory, says the market may correct by 2 to 3 percent in the near future.
To prepare for the anticipated fall, the investors should keep 5-10 percent cash with them. As some investors are cautious about major selling by foreign institutional investors (FIIs), Chokkalingam allays the fear when he says that this would not happen because any major selling will be harmful to the institutional investors since this would cause a fall in the value of Indian rupee, eroding the worth of their own portfolio.
Next course of action
Once investors start to book profit, the bigger question that lies ahead is where to park the money? Chokkalingam says the investors should keep considerable exposure to some of the quality stocks which are still available at the pre-pandemic valuation.
He also advises that investors can keep one-third of their portfolio in the top 250 institutional stocks. “There could be a slight fall in the market in the short run, but the medium to long term growth is promising for Indian markets,” he says.
For safety, one can explore shorter duration debt funds. And if you have a long-term horizon, you can think of target debt funds.
Mr Kapur argues that it is imperative to choose safe investment products. “At a portfolio level, focusing on your long-term asset allocation with safer investment products is more prudent. At a stock selection level, try not to pay too much for potential growth,” adds Kapur.
The investors are advised to reexamine the stock price if they have reached astronomical levels. Those who want safety should move to blue chip stocks. And those who have a high risk appetite can consider growth stocks.
In summary, the market tends to witness minor increases or decreases from time to time. Instead of panicking, investors should choose the right stocks which are reliable as well as safe in the long run regardless of the market correction.
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First Published:28 Oct 2021, 05:18 PM IST
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