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Friday, February 26, 2016

Realign Portfolio in 2016




Large-caps are trading at a discount to midand small-caps, which look overvalued and may correct further

Should I stop my systematic investment plans (SIPs) in equity mutual funds? Should I redeem my existing schemes? These are some of the questions panicstruck retail investors are asking amid the rout in the stock market that has eroded the value of their holdings. This time, however, financial advisors are not asking investors to maintain status quo. Instead, they are advising clients to tweak their portfolio to suit the new market conditions.

What has changed?

 

Till recently , investor portfolios were heavily biased towards midand small-cap schemes. Now, advisors are asking clients to invest more in blue-chips.

We had recommended a 70% exposure to midcaps and 30% to large caps; but now we are asking investors to do exactly the reverse.

Large caps are trading at a discount to midand small-caps, which were among the top performers in the last two years. In 2015, BSE Midcap Index rose about 7.4%, and Smallcap Index 6.7% compared to the 5% drop in the Sensex, which consists of the country's top blue-chips.

So far this year, large-caps have fallen lesser than the smaller shares. The Sensex has fallen 6.4% since December 31 against the 9% fall in the mid-cap index, and 12% decline in the small-cap index. Fund managers and analysts expect the fall in smaller shares to deepen over the next few weeks.

While midcaps have corrected over the past two weeks, we believe they are still overvalued; hence, opportunity lies in the large-cap space.

Financial advisors said a reshuffling of the portfolio will be more beneficial than stopping SIPs. Many retail investors who started investing through the mutual fund route in late 2014 and 2015 are now sitting on mark-to-market losses on their systematic investment plans (SIPs).

In the previous falls many retail investors panicked, and many of them stopped their SIPs. As a result, they could not take advantage of the falling stock prices and the subsequent rebound in 2009.

A reason for this could be the use of goal based financial planning. He believes many wealth managers have tagged long-term goals like child education or retirement to equity SIPs of investors. Since these goals are far away , investors are not too worried about market volatility and are working in accordance with their financial plan.

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