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How Should You Position Your Portfolio In The Next One Year?

Author: Kumar Shankar Roy/Wednesday, November 14, 2018/Categories: Financial Planning, Expert View

How Should You Position Your Portfolio In The Next One Year?

The New Gujarati year or Samvat 2075 has begun. In the next one year, different events will happen that can shape the way markets behave. First of all, the outcome of state and national elections will determine the near-term and medium-term course. Stock markets prefer a status quo, and if actual results are different than expectations, there will be volatility in anticipation of a hung Parliament in 2019 main election. Second, remember that any further default of any big institution could surprise the domestic market leading to risk aversion. Third, liquidity drying up in global markets to ensuing quantitative tightening moves by the US Federal Reserve is a possibility. India and other emerging markets have been awash with foreign money for some years after the global financial crisis, and when this money flows out, it will have an impact on asset prices. Fourth, any disruption due to a disorderly exit of Britain from EU along with Italy can leave a telling blow on global sentiment. Plus, volatility in crude oil prices in the light of the Middle East situation and India’s dependence on crude imports can also have an impact. In this situation, it will be important for investors to accordingly position themselves. Safety and quality are very important now. Let us have a detailed look.

Aggressive profile investor

This investor is likely to keep 100 per cent equity exposure since they believe no other asset class can match equity returns. They view all market corrections as a long-term buying opportunity. But, investing everything at one go may not be right. It is seen that markets usually shrug off any negative impact in 5-6 months. So, a systematic approach is best for aggressive profile investors. They should slowly build up positions in direct equities and mutual funds. Have some cash in hand, like 20 per cent for lumpsum deployment as and when the need arises. Due to some events, markets may temporarily show dislocation between stock price and fundamentals. This is when cash comes handy. To build the portfolio over the next 4-5 months, one can use the systematic withdrawal plans to shift money from debt to equity in a controlled manner. This will ensure that the investor earns returns even when the money is lying idle. Aggressive investors with 1-year time horizon should not invest in alternatives, even if they have the financial resources to do so. This is because any exotic alternative asset class is quite risky, compared to equities, when especially the time period is just 1 year.

Medium profile investor

It is difficult to completely bracket somebody who has a medium risk profile. Still, the starting point for such an investor would be 50 per cent equity investment if your time horizon is next 12 months. It is best not to stray into midcaps and smallcaps. Stick to high quality largecap stocks for equity and use mutual fund portfolios to take the exposure to equity. Buy companies who are leaders in their field, with at least 2-3 decades of track record, low debt/equity, high cash balances etc. Safety is paramount even when you invest in equities. Stagger your investments through this period. Debt is an important asset for this investor. You should keep 25-30 per cent of the money in debt. This could be in form of bank FDs, liquid mutual funds and ultra short term mutual funds. Debt allocation will act as a cushion if markets suddenly wilt due to political reasons. It is advised that 10 per cent deployment is in gold. There is no point in buying physical jewellery or gold bars/coins. Go for sovereign gold bonds (SGBs) that can pay you 2.5 per cent interest and also allow you to participate in the gold price upside. Lastly, like an aggressive risk profile investor, even an investor wanting to take medium risk should have some cash. You can keep 5-10 per cent cash to be used as a tactical asset in case you want to change the mix by adding exposure to one asset (in a bear market, you can add debt - in a bull market, you can add stocks). 

Conservative profile investor

This is the exact opposite of an aggressive profile investor. But instead of having 100 per cent allocation to debt, we suggest you use the 85-15 rule. We understand that a conservative profile investor does not like their portfolio go down in the negative. But to completely stay away from equities may not be an optimal strategy. Yes, there are big risks if election outcomes surprise on the negative side. Globally, with politicians like Donald Trump, anything can happen. Yet, it will be foolhardy to totally avoid equities. Invest 85 per cent of your funds in the safest of bank FDs, and liquid avenues. If you choose debt MFs, look at whether the money is invested in the private sector or quasi-government institutions. Ideally, one should only stick to avenues where money is invested in government securities and triple-A rated (AAA) fixed income instruments. Keep 20 per cent of the money in equity by buying index funds or Exchange Traded Funds (ETFs). Do a systematic investment plan (SIP) in these equity instruments/products for the next 12 months. With an 85 per cent debt allocation and the interest income, your principal will be mostly protected. The additional 15 per cent equity allocation will help you participate in the stock market in case it rallies.

Bottom line

It may well be true that you are not exactly either of these 3 profiles mentioned above. You may be between an aggressive and a medium risk profile investor. You may be somewhere between a risk-averse profile and a medium risk profile. You have to take that call. Twelve months is a short period of time to be invested for. But, these 12 months can also surprise you. The consensus view about the next 12 months is that it would be quite challenging marked by uncertain political events and evolving macroeconomic scenario. Political events will include assembly elections in 3 major states, which will set the tone for the upcoming Lok Sabha polls in April-May 2019. From an equity market standpoint, the stock market is unlikely to see any significant re-rating from the current levels unless there is an unexpected good news. So, one should use debt/fixed income opportunities much more in this environment. 

The author is a financial journalist with 13 years experience

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Kumar Shankar Roy
Kumar Shankar  Roy

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