If your portfolio is already equity-heavy and you need the money in the near future, it may not make sense to add more stocks or equity funds. You should instead look at realigning your asset allocation level
If you are an equity investor, seeing your portfolio fattening, given the current market levels, would be surely heartening. The stock market recently breached another psychological level, with the BSE Sensex index crossing the 75,000 mark. And carefully crafted portfolios would be reacting positively to that development. In fact, even some not-so-carefully-crafted portfolios may be experiencing a high.
Spirits are up but such times can also be dangerous for your portfolios, if you don’t steer clear of some impulsive decisions. Let me list three of the most common ones.
One, if you are a compunctious investor and want to follow the common advice—buy when markets are low and sell when they are high—you may feel it’s the right time to book some profits. That advice does make a lot of sense, but not in all situations. If you don’t need the money immediately and your equity-debt ratio has not changed significantly, you may do well to remain invested even at such high levels.
Those high fixed deposit rates—currently in the range of roughly 7-8 per cent—may look attractive, especially because the interest rates seem to have peaked and are expected to be reduced later in the year. But weigh that against the long-term returns of 10-12 per cent in quality stocks and funds.
Two, you may also feel tempted to sit on cash until the market comes down to invest it oppotunistically, but if you don’t track the market regularly or don’t have enough knowhow, you should steer clear of this trading mentality. Various experts, research reports and even politicians like Amit Shah have, in fact, signaled that the market may reach higher levels soon.
Don’t fear the market rally and pause your systematic invetsment plans (SIPs) or other investments. SIPs, in particular, are meant to balance out different market levels and create wealth. As Kundan Kishore’s analysis of a couple of OLM 50 funds shows: if you started a monthly SIP of Rs 15,000 in SBI Small Cap Fund in 2010, your investment would have grown to Rs 1.57 crore by May 17, 2024. Similarly, in Kotak Small Cap Fund, it would have reached Rs 1.24 crore over the same period. Even if in a large-cap fund, known for lower risk compared to small-cap funds, such as ICICI Prudential Bluechip Fund, it would have grown to Rs 84.21 lakh.
Three, you may want to simply follow the herd—or perhaps heed Shah’s advice—and rush to invest more. The markets may indeed go up in the future, given the positive macroeconomic indications, but whether you should expose yourself to equity in excess in such times would again depend on the situation you find yourself in.
If your portfolio is already equity-heavy and you need the money in the near future, it may not make sense to add more stocks or equity funds to your portfolio. In fact, in such situations it would make sense to book some profits and keep it aside for the imminent need. Also, if the equity portion has swayed significantly higher, you should prefer realigning it to your preferred asset allocation level. The level of debt or equity you should have in your portfolio depends on multiple factors such as your risk appetite and capacity, any upcoming need for cash, your age and others.
The markets are in a flurry, but that doesn’t necessarily mean you go into a tizzy too. Before doing anything, think through your decision.