You can take some profits if your asset allocation demands so
Despite there being no changes in income taxes, Budget 2021 has implications for your investment portfolio. While equities have been on fire since the Budget announcement, the debt markets have taken on the chin.
Here’s how you should approach your investments, for the rest of 2021.
Equity market rally not reason to gamble
Between January 29 and February 3, the Nifty index rose 8.47 percent. The broad-based rally in equities towards the latter half of last year got a boost from Budget 2021. “The increasing shift to the organized sector after the lockdown, a pro-growth government keen to spend on infrastructure & core sectors and low cost of funds for corporates are positives for stocks in the medium term,” says Sonam Udasi, Senior Fund Manager, Tata Mutual Fund.
Over the last one year, mid-cap funds gave 23.31 percent returns. Small cap funds delivered 25.78 percent returns, while large-cap funds gave 21.53 percent, as per Value Research data.
But Jignesh Shah, Founder of Capital Advisors says that investors must keep their future expectations in check. “Whenever there are market corrections, deploy small lump-sums. Else, it’s best to stagger your purchases in multi-cap or flexi-cap schemes,” he says. Though Budget 2021 holds promise for many themes, beginners are better off avoiding thematic offerings.
If you have heavy profits from your equity mutual funds, it doesn’t mean you have to sell your holdings. A better approach is to “stick to asset allocation: this helps you to sell in a disciplined manner,” says Rishiraj Maheshwari, Founder and CEO, RISCH Wealth & RISCH Family Office. “You can take some profits if your asset allocation pattern demands so and allocate that money to other asset classes such as gold, which are undervalued, in line with your asset allocation based on your risk profile,” he adds.
Interest rate cuts may soon come to an end
The bond markets rallied for the past three years. Budget 2021 brought in a reality check. The government borrowing plans for financial year 2021-22 outlined in Budget 2021 has meant that interest rates may begin to rise eventually.
Still, do not sell your debt funds, say experts. “It is important to stick to your intended investment horizon to ride through the volatile phase,” says Lakshmi Iyer, Chief Investment Officer-Debt, Kotak AMC. “There is ample liquidity in financial markets and Reserve Bank of India is expected to take time before hiking rates,” she adds.
Avoid investing in long-term bond and long-term government securities funds now. Stick to short term bond funds. Jitendra Solanki, a SEBI registered investment advisor recommends investments in banking & PSU Bond funds and corporate bond funds. “Though bond funds have done well in the recent past, investors are better off moderating their return expectations going forward,” he says.
“Well-managed credit risk funds can be looked at as yields on ‘AA’ and below rated bonds are expected to continue their downward move reducing the gap between them and their AAA rated counterparts,” says Iyer. Credit risk funds are, of course, for investors with a high risk appetite.
Avoid chasing returns by getting into unrated fixed deposits or bonds.
Gold rally subdued
The yellow metal has posted subdued performance in recent past. Domestic prices of gold lost 10.3 per cent in last six months. Union Budget 2021 has proposed a cut in customs duty on gold to 7.5 percent from 12 percent. It further imposed agriculture and infrastructure development cess on imported gold. “Cut in customs duty has led to drop in value of gold held. However in the medium term, gold prices should appreciate due to ample liquidity in the financial system and gold’s ability to act as a portfolio hedge in uncertain times,” says Shah.
Ideally allocate 5 to 10 percent of your investment portfolio to gold. Opt for gold exchange traded funds (or gold fund of funds if you do not have a demat account) or sovereign gold bonds.
What should investors do?
Take stock of your asset allocation. Irrespective of where the markets go from here on, this should be your anchor. Instead of booking profits haphazardly, use market movements to re-allocate your assets. For instance, if the equity share in your portfolio has gone up, move some assets to either gold or debt. Or, if you have some expenses coming up, in say the next 6-9 months, then it’s better to take some money off the table and shift to liquid or overnight funds or your bank account.
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