As the Sensex has now risen close to 60% since March when it hit the lowest level due to the outbreak of Covid-19 pandemic in the country and the nationwide lockdown, equity investors should look at some profit booking and move money from equities to debt or gold to rebalance the overall portfolio. Equity valuation has become expensive as surplus liquidity in the markets is driving up stock prices without any significant recovery in the real economy. Market volatility, too, remains high and earnings growth has been at low single digits for the last six years.

Asset allocation strategy
Asset allocation is the first step to build one’s long-term portfolio. It should factor in the investor’s age, risk appetite, and financial goals such as buying a house, higher education of children or retirement. Investing over the long term and rebalancing the portfolio periodically are the most important factors that an investor must keep in mind to create wealth. Adhering to a proper asset allocation strategy—investing in equities, debt, gold, real estate—and rebalancing the portfolio will help an investor to ride out the market volatility and not panic when there is a market correction.

Brijesh Damodaran, managing partner, BellWether Advisors, says asset allocation is a must in the wealth creation journey and it is unique for each individual. “An individual should set up the asset allocation framework based on the goal, risk appetite and risk tolerance. He has to ensure that at least 36 months of liquidity is in place, as black swan events can create uncertainty, out of the blue,” he cautions.

Profit booking in equity
Typically, when there’s a correction in the markets, individual investors panic and sell their equity-related investments anticipating a further fall. Some even liquidate all their equity portfolio and money to fixed income instruments such as bonds, small savings, bank deposits. Investors should not rush to invest in equities now because the markets are rising. Instead, they should revert to their asset allocation strategy and buy in dips.

Mutual fund investors should continue their systematic investment plans (SIPs) to take advantage of the cost averaging. In fact, while there is a moderation in the inflows through SIPs, the share of SIPs in the total assets under management in September is at 13%, a record high. Also, during the last four years, the number of SIP accounts increased 30% to 3.3 crore.

Investors must keep in mind the tax impact on long-term capital gains and short-term capital gains before doing any profit booking. Long-term capital gains accrued from selling equity-related investments after one year of holding are taxed at 10% for redemption over Rs 1 lakh in a financial year. Short-term capital gains (holding below one year) are taxed at 15%. Analysts say if an investor is looking at profit booking, he should redeem those units which have completed one year. Rebalancing will also help an investor to remove low quality stocks and/or underperforming schemes from the portfolio.

Increase debt allocation
The profits booked from equity can be invested in fixed income securities and even gold to rebalance the portfolio. If an individual is nearing retirement, the allocation to debt should increase. Investors can look at lower-risk debt categories. Ideally, one should have a certain allocation to debt mutual funds and choosing the right type of debt funds is important. Analysts suggest corporate bond funds and banking and PSU debt funds are ideal investments in the current environment.

Before investing in debt funds, analyse the credit risks and interest rate risks. Analyse the fund house’s investment portfolio—whether the bonds are from well-known companies—and check whether the fund manager is chasing returns by taking higher credit risk. Also look at liquidity risks of the funds and understand how quickly the fund manager can sell the particular paper in case of any downgrade. Corporate bonds of high-rated companies are more liquid than the lower-rated paper.