The rebalancing act for 2018
With equity valuations getting stretched, book some gains there and shift money to fixed income and gold
As 2017 draws to a close, investors need to take time out to review their portfolios. The winning asset class changes from one year to the next. The one that performed very well in the past year would have also become expensive, and hence riskier, making it imperative that you book profits in it and invest in asset classes that have underperformed. This year, you need to shift money from equities to fixed-income and gold. Equities: Reduce allocation to equities but only to the pre-decided level, as there is a strong possibility of a turnaround in earnings as economic growth improves. “A better execution rate in infrastructure, recovery in private sector capex, and export growth will provide impetus to the economy,” says Ashwani Kumar, senior fund manager, Reliance Mutual Fund. According to Hemang Jani, head-advisory, Sharekhan, “Consensus earnings growth estimate for the Sensex in 2018-19 is pegged at 14-15 per cent.”
While volatility was low this year, be prepared for a correction. Liquidity reduction by Western central banks could cause this. Mid- and small-cap funds outperformed large-cap funds this year. But, valuations have risen very high in that space. “Valuations in the large-cap space are more reasonable. The probability of making good returns with less volatility is higher in the large-cap space,” says Kumar. Have at least two-third of your equity portfolio in large-cap funds. Debt mutual funds: This year shorter duration funds outperformed longer duration funds. Over the past three months, the 10-year government bond yield moved up from around 6.5 per cent to around 7.17 per cent, affecting the returns of longerduration funds. A variety of factors contributed to the hardening of the benchmark yield. “The Reserve Bank of India (RBI) changed its stance from accommodative to neutral. Rising crude oil prices have led to fears that the current account balance could be impacted. After the cut in goods and services tax (GST) rates, there are worries of fiscal slippage by the government. Central banks in the West are in tightening mode, which could lead to outflows from India,” says Dwijendra Srivastava, chief investment officer-fixed income, Sundaram Mutual Fund. If things don’t pan out the way the markets expect, the 10-year G-Sec yield could head a little lower.
Funds that invest in corporate bonds did better than duration funds, one reason being strong foreign portfolio investor (FPI) interest in these bonds, which cushioned the fall in their prices. Credit opportunity funds, which bet on lower-rated papers, also did well. However, investors should avoid putting more than 10 per cent of their debt fund portfolio in them due to their higher risks. Currently, about 60-70 per cent of your debt fund portfolio should EQUITIES DEBT GOLD Small-cap Mid-cap be in shorter-duration funds. Fixed-income: Returns offered by instruments like bank fixed deposits (FDs) and post office small savings may not decline further in 2018. “Inflation expectations, global economic recovery and RBI’s latest monetary policy stance all point towards a general status quo on rates,” says Somnath Mukherjee, managing partner and head-investment advisory and strategy, products and international business, ASK Wealth Advisors. 50.30 38.54 22.29 17.57 29.76 24.07 He suggests that investors should diversify into a basket of fixedincome products: short-term debt funds, small savings schemes and tax-free bonds. Bank FDs, he adds, do not offer good value post tax. Gold: Gold has given a return of 2.9 per cent year-to-date. Until September, it was up seven per cent, but then expectations of rate increases in the US and the optimism surrounding tax reforms led to a price correction. Maintain an 8-12 per cent allocation to gold. “Next year we are likely to see lower liquidity, as the US Fed Reserve winds down its balance sheet and the European Central Bank reduces bond purchases. Stretched equity valuations may not sustain in a lower liquidity environment. When equity markets come under pressure, gold could do better,” says Chirag Mehta, senior fund manageralternative investments, Quantum Asset Management Company. More efficient instruments such as sovereign gold bonds now exist, so switch to them. Life insurance: Re-evaluate your life cover to account for changes in your situation. “If you have taken a new loan, increase your cover, while if you have repaid one, reduce it. If you have decided to send your child overseas for education, hike your cover. If your spouse has decided not to go back to work, again hike your cover,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. Check the cost of your cover to see if you can take advantage of lower premium rates. If you hold unit linked insurance plans, evaluate their performance against their benchmarks and rebalance from equity to debt. Health insurance: Health care inflation tends to be high at 12-15 per cent. “If your coverage is not sufficient, increase it. If you need to include new family members in the cover, do so,” says Puneet Sahni, head-product development, SBI General Insurance. With advancing age, evaluate the need to buy a top-up cover. Rebalance portfolio: By the end of the year, the portfolio tends to become overweight in the asset class that has done well. This year mid-and small-cap funds have done very well. Sell a portion of your holdings there and move money to fixed income and gold. Finally, check portfolio expenses. “When the markets are doing well, investors focus less on expenses. Check if you need to get rid of any high-cost product,” says Dhawan.