As the broader market indices are hovering around their all-time highs, what exactly should retail investors do: continue to invest or redeem their assets and opt for profit-booking?
Well, there are pros and cons to both. When the market undergoes a bull run, it is prudent to continue to invest to make the most of market rally. The age-old maxim ‘rising ride lifts all boats’ comes handy to understand why it is wise to invest when the markets are on a bull run.
But if you follow this strategy, you would end up losing -- if the markets start falling later -- for having bought securities at a higher valuation.
On the other hand, it is also reasonable to redeem securities and carry out profit-booking. During a bull run, this — too — may be counterproductive because the market may rise further. And after you redeem, say, eight percent profit, the market may rise further by another seven percent. That would eventually make you regret your decision.
So, what should you do? We speak to experts and find out:
Prefer largecaps
Since the markets could be headed for volatility in the near term, it is advisable to redeem small and mid-cap stocks and invest the proceeds in large caps, say experts.
Chokkalingam G, founder, Equinomics Research & Advisory, says, “There is a lot of volatility ahead and it is, therefore, time for the investors to book profits in small and mid-cap stocks, and raise the asset allocation to large and large mid-caps. One should also raise allocation to gold ETFs (exchange traded funds).”
While explaining the reasons for volatility, he says, “There are state elections around the corner and general elections in April next year. And if oil prices increase again, then also there could be an adverse impact on the markets.”
Rebalance the portfolio
Some experts also suggest that it is a good time to rebalance the portfolio by selling a portion of equity investments and using the funds to invest in fixed income instruments.
Ravi Saraogi, co-founder of Samasthiti Advisors, says one should increase allocation to fixed income instruments. However, if you are saving for retirement, then it does not make sense to redeem your investments. But if you are investing to achieve short-term goals, then you can increase allocation to fixed income instruments.
To explain the reasoning for this, he says, “It is a good time to book profit and redeploy money in fixed income instruments as the interest rates are quite high. There is a good earning potential offered by the bonds as they are offering 8 percent. Some state electricity bonds are offering anywhere between 8 - 10 percent apart from some AAA-rates bonds offering 8 percent.”
Vaibhav Porwal, Co-founder, Dezerv also talks about the need to rebalance the portfolio.
"Given the current market levels, instead of focusing on profit booking, one can relook their overall portfolio construct and rebalance their portfolio based on their risk profiles. Further, a lot of mid and small cap stocks have seen a strong rally which may have led to unreasonable valuations. This is a good time to sell these stocks and deploy these funds in actively managed mutual funds," says Mr Porwal.
Sridharan S, founder of Wallet Wealth, echoes the same sentiments and says, “Investors should go for rebalancing of asset allocation. Let us suppose the target allocation in a portfolio is 70 percent equity and 30 percent debt and if equity allocation now stands higher at, say, 80 percent because of the bull run, then one should bring it down by 10 percent and invest the balance in fixed deposits (FDs) or bonds.”
“Besides, if someone is investing in SIPs then one can continue to invest in SIPs and one can even start the SIP,” he adds.
Based on time horizon
There is another way to relook at the right investing strategy i.e., deciding it on the basis of time horizon. So, one should make changes in the portfolio on the basis of tenure of financial goals.
“If your financial goals are 2 to 3 years away and you are heavily invested in equity, it is a good chance to book the profits and redeploy the proceeds in safer instruments. If your goal is in mid-term then, it is a good opportunity to book the profits and transfer funds to the debt. For long-term goals, one should continue with your SIPs. Do not pause or stop them,” says Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services.
To sum up, we can say that the ongoing bull run induces investors to relook at their portfolio.
They can go for profit-booking of a part of their portfolio, particularly of small and mid-cap stocks and funds. Later they can redeploy the proceeds into a) largecap funds and b) fixed income instruments.
The former will enable their portfolio to sail through volatility and the latter are currently offering higher rates of interest.
