Like equity investors, mutual funds investors have also been wondering if these new highs are a signal to rethink their portfolios. However, mutual fund investors need to realize that their holdings fit into a larger scheme of things called financial goals. Here is what mutual fund investors need to do in these circumstances.
Don’t lose focus on your goals
Normally, mutual fund holdings are pegged to your life goals. These could be liquid funds pegged to short term goals, debt funds pegged to medium term goal or equity funds pegged to long term goals. As long as your portfolio mix is being reviewed on a regular basis, you don’t need to make any drastic changes to your mutual fund portfolio. Most of your equity and debt funds are pegged to goals and disrupting any of these holdings will disrupt your goals. It is very important not to lose focus on your goals because the financial plan has in-built risk management mechanisms to take profits off the table at higher levels and enhance liquidity at lower levels.
With equity funds, avoid the lure of themes and sectors
It is always quite tempting to earn that extra alpha via sector funds and thematic funds. Many of these themes can be extremely cyclical and the risk gets elevated at higher levels of the Sensex. Your primary focus in these times should be to stick to diversified equity funds. Of course, you can take the risk of multi-cap funds for that additional alpha. What is more important is that you stick to the rules set for your overall portfolio in terms of churning and re-allocation. That acts as an automatic hedge for you against any volatility in the equity portfolio values.
To be on the safer side, stick to a systematic approach
You would have heard about the merits of a systematic approach repeatedly. When the Sensex touches a peak, any lump-sum investment becomes all the more risky. However, a systematic approach or a SIP approach can be helpful in two ways. Firstly, it allows you to allocate liquidity in a phased manner. Secondly, it also permits you to get the full benefit of rupee cost averaging which reduces the overall cost of acquisition over a period of time. Since Sensex tends to be volatile at these levels, a systematic approach would work better in the long run compared to a lump-sum approach.
Look to churn your portfolio mix
When the Sensex is at peak levels and the valuations are also higher than historical averages, it is time to stick to the big growth stories. If the MF portfolio did not create value by the 40,000 level of the Sensex, it is highly unlikely that it will create value in the future. Also, if there are mid cap portfolios with dubious records or corporate governance issues, this is the time to move to quality. The markets become a lot more quality conscious at higher levels and you need to tweak accordingly.
It is always better to reduce the default risk in your debt portfolio
If you are holding debt funds with a portfolio tilted towards corporate bonds then you need to be careful about the default risk in your portfolio. Check the portfolio of the debt funds that you are holding. Funds holding “AA” rated debt should ideally be avoided. There are a couple of reasons for the same. Firstly, the credit risk funds with lower rated debt are most vulnerable to economic cycles and that can impact performance. Secondly, if the company in question has pledged its shares, then the bond prices can become extremely vulnerable and that can have a negative impact on the NAV of the debt fund. At such levels of the Sensex, it is always better to stick to tried and tested G-Sec funds or AAA rated bond funds. Quality, at these levels, is worth its weight in gold.