BackShould you sell your equity funds now?
Don't make hasty decisions about equity. Before you buy or sell it, make sure you understand the risks and that you are buying into equity for the long term
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Godrej Sachinwalla, 63, a Thane-based retired professional is watching the equity markets with concern these days. He used to be a stock broker, on the side, at the BSE Ltd in the 1980s and 1990s; and has seen many rising and falling markets. He prefers to directly buy and sell shares, but invests in tax-saving mutual funds once a year for his tax-planning. This year, he hasn’t yet. “I feel one big correction will happen in the markets before 31 March. I will invest then," he said, sipping tea and adding that he regrets his “one missed chance" to invest in a tax-savings fund around June-July 2017.
In Bangaluru, Manoj M.J., a 23-year-old software professional, will invest in a tax-saving fund shortly, unfazed by where the equity markets are. “I am not bothered about market levels…I am in it for the long term. It’s more like a provident fund replacement for me...so doesn’t bother me that much," he said. This won’t be his first time in tax-saving funds. His last year’s investment has retuned 35% so far.
One market, similar needs, two different reactions. With the S&P BSE Sensex crossing 35,000 for the first time last week, excitement is natural. But should you book profits and sit on cash at the moment? Or is it still okay to continue to invest in equity markets and equity mutual funds?
Equity share prices have gone up in the past year partly because there are more buyers in the market. From pumping about Rs4,000 crore a month into mutual funds through systematic investment plans (SIPs) in January 2017, investors were putting in around Rs6,000 crore a month by end of 2017. Demonetization also led people to invest more in financial assets. “Among various asset classes, financial assets outperformed. Gold and real estate didn’t return much. So there has been a generational change in...preference for financial assets," said Deepak Chhabria, chief executive officer and director, Axiom Financial Services Ltd, a Bengaluru-based distributor of financial products.
Analysts are also expecting an improvement in corporate earnings from the December 2017 quarterly results. Analysts also expect the government to enhance focus on agriculture and rural themes to address farm distress in the Union Budget. The government is expected to increase spending on rural infrastructure, roads and power projects.
Gopal Agrawal, chief investment officer-equities, Tata Asset Management Co. Ltd, said that India’s equity market isn’t the only rising; there is a global pattern: “Stabilization of the Chinese economy, along with reduced production and supply of metals in China due to the crackdown on pollution-causing plants, have given a breather to the global commodity markets." The Indian government’s reform agenda is positive, and the consumers’ push towards premium products points towards a recovery of sales of Indian companies, Agrawal added.
Rising equity markets led to equity mutual funds giving good returns the past year. On average, diversified equity funds returned 30% last year. On a 5-year basis, equity funds returned 15%.
Gurugram-based Ashish Chadha, a mutual fund distributor, said in a lighter vein: “This is a bad time to be in business." These days Chadha is nudging his clients to book profits. “Every time markets rise by 2,000 points, we nudge our clients to sell some of their equity holdings and perhaps prepay their loans or just go on a holiday. Whatever you’ve wanted to buy and couldn’t afford, this is the time to buy," he said.
Why does Chadha think this a bad time to be in the market? “Almost every new investor wants to invest in equity. It’s a frenzy. We advise new investors to invest in equity funds only if they have a 10-year horizon, but many are not convinced. Also, debt yields are rising, so bond funds have suffered; investing in equity and debt these days, have to be done cautiously," he said; pushing him to recommend equity funds (only for 10-year horizon) and short-term funds (like liquid funds) and short-term bond funds. But this is not what investors want in this bull market.
Some experts point out to a froth in the market. After returning 48% in 2017, the S&P BSE MidCap index has fallen 0.32% since 15 January to 23 January. The S&P BSE SmallCap index too fell by 342.03 points or 1.71% between 15 January to 23 January.
There is no need to pull out from equity markets. Continue your SIPs but you might need to prune your portfolio a bit to reduce its risks.
“Ensure that you don’t allocate to equities more than your risk appetite. If your risk profile says that you should invest, say 60% in equities and rest in debt instruments, then a raging bull market would have surely pushed up your equities by now, far beyond 60%. Bring it down. If the portfolio is skewed towards mid- and small-cap funds due to a larger gains in that segment, rebalance," said Chhabria.
If you are a new investor and haven’t yet invested in equity, be cautious. Stick to a combination of low-risk funds like equity savings funds, short-term bond funds and liquid funds. Since both equities and debt are part of your asset allocation, we shouldn’t avoid equity completely. Limit your equity allocation to large-cap equity funds for now, if you are a fresh investor. And have a time horizon of at least 5-7 years.
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