At a time when equity is at all-time highs and debt yields at lows, investors should look at a low-risk way of investing. A rebalancing will help an investor bring the portfolio to the original asset mix and average the investment cost.
So, given the elevated index levels and stretched valuations investors should look at ways to protect the downside to their portfolio in case of any short-term market correction.
Stay with asset allocation
With the markets rising, the proportion of equity in the portfolio would have increased for most investors. In such a case, it is better to relook at the portfolio and gradually reduce the overall allocation to equities. This will help to reduce risk in the portfolio. An asset rebalancing by selling some equity portfolio and investing the amount in debt can help in the long run.
As different asset classes move in different directions, investors must review their asset allocation at regular intervals. As different asset classes have varying cycles of performance, a good asset allocation plan can help an individual reach his financial objectives with the degree of risk that he finds comfortable.
In asset allocation, the decision to add more to equities or exit from equities should depend on factors such as tolerance to risk and long-term goals. Ideally, investors must increase the portfolio of high dividend paying stocks as one can earn steady dividend income in the long-term. Rising dividend payout ratio over a long period of time can be a good income source after retirement.
Avoid lump sum investing
A new investor in a mutual fund should avoid investing money in a lump sum. In the current market scenario, if one invests a significant amount of money in a lump sum, then there is a risk of losing some amount if the market sees some correction. Instead invest in a staggered manner through systematic investment plans (SIP) as they allow an investor to buy units on a given date each month. The biggest advantage of an SIP is that the investor does not have to time the market.
An investor can invest through systematic transfer plans (STPs) where funds are transferred from one fund to another in the same fund house, ideally from debt to equity. In volatile market conditions, individual investors can stagger investments through STPs by investing a lump sum in debt, which could be a liquid or ultra short term fund, and then transfer a fixed amount either monthly or quarterly into an equity fund.
Look at multi-asset funds
In the current scenario, multi-asset funds of mutual funds can be a good option for asset allocation mix as they invest in a combination of equity, debt and gold exchange traded funds. These funds have an equity allocation of around 65% and the rest in debt and gold. The fund manager does the reallocation of the asset mix depending on market volatility and returns. As a result, higher returns from a particular asset class can offset the poor returns from the other class. The fund house does the rebalancing and helps the investor to hold a diversified portfolio.
Go for index funds
Instead of investing in direct stocks, one can look at index funds which will have stocks of market leaders across different sectors and the fund managers’ intervention is very limited. Individual investors who are not market savvy should stick to index funds for convenience, liquidity and ease of investing. Ideally, an investor should look at an index fund that tracks a broad market index rather than funds that track a sector or a theme. As the expense ratio of index funds is lower (10 to 50 basis points) than other actively managed funds of asset management companies, returns generated can be higher in the long run.