Without getting worried about the market sentiments, investors should remain invested in equities with proper asset allocation strategy.
Equity markets globally had risen almost uni-directionally over 2017. While in the bull market rally when Sensex crossed the 36000 benchmark, investors were getting more optimistic. However, the recent PNB crisis dampened local sentiments a bit, leading to correction broadly in line with global equities sell-off. Recently, the Indian equity market has dropped by almost 3000 points. Should investors be pessimistic or should they take it as an opportunity to buy and grow their wealth with time.
Investors should always expect corrections of 10-15% in any bull market rally, so this correction was actually helpful. Himanshu, Co-Founder, Client Associates told Moneycontrol that Indian valuations have been overheated for quite some time, so this correction helped cool off the valuations slightly. In addition, the earnings for this quarter have been slightly better than expected, and we are seeing EPS growth rates in the order of 12-13%. Strong earnings growth rate should also help to ease off the valuations risk.
“One of the big reasons for global corrections since late January has been the rising interest rates in the US, and in most parts of the developed world. Rising interest rates, on one hand, indicate a period of high global GDP growth rates, which should boost companies’ top and bottom lines. On the other hand, higher interest rates also mean higher cost of capital for companies, which needs to be adjusted in equity valuations. The battle between better economic prospects but the higher cost of capital is weighing on the market sentiments currently,” he added.
However, investors should not get worried about the market sentiments and should remain invested in equities with proper asset allocation strategy.
What should investors do?
Well, investment strategy should differ with age. Market rises and falls for both, but the strategy applied during those times should be apt so that one can make money in the long run despite facing market volatility.
=> New or young age investors looking for an investment horizon over long-term growth should go for equity funds investing to earn higher returns. Also, if an investor is conservative and looking to invest money for long-term financial goals can consider investing in equity hybrid funds that aims to gain from market volatility over the long term while maintaining a lower risk profile than pure equity funds. Going for direct equity investment for a long term can also be considered as one of the good options at a young age.
=> An investor who is nearing retirement and is looking for higher tax returns may consider investing in equities specifically balanced fund over fixed deposits as they carry tax-free status (if gains are below Rs 1 lakh else above this will get taxed at 10 percent) on the long-term capital gains on doing equity savings. This leads to higher post-tax returns too.
Following asset allocation through diversification
Proper asset allocation will help investors to minimize risk even if markets fall or there is high volatility in the market. Since the funds categorized in the equity mutual fund basket are mainly large cap, mid cap, small cap, flexi-cap, diversified fund, balanced fund, etc. Equity fund gives investors a lot of flexibility in doing asset allocation. Even if you are going for balanced or hybrid funds, this equity savings fund holds an advantage of equity taxation while restricting the debt exposure to 35 percent.
Typically, while making one’s portfolio, an investor should invest 30 to 40 percent of the investments in large-cap, around 30 to 20 percent in mid and small-cap and the rest in bonds. This helps in doing asset allocation strategy within an equity portfolio.
Following proper asset allocation strategy will help you achieve your financial goals over a period of time irrespective of market volatility. Not only this, it also helps in minimizing the risk of investors invested money during market fluctuations to an extent. The only thing an investor has to do is to keep on diversifying their investment.
