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Monday, December 06, 2021

Explained: With markets likely to stay strong with some correction, weighing the hybrid funds option

Existing investors who have been invested for varying lengths of time and are in different life cycles, need to adopt strategies that are suitable for them.

Written by Sandeep Singh | New Delhi |
Updated: October 22, 2021 7:37:01 am
Traders express joy as Sensex climbs above 60,000 points, at the entrance of the Bombay Stock Exchange (BSE) in Mumbai in September. (Express Photo: Ganesh Shirsekar)

With markets hitting new highs over the last couple of months, there have been concerns over sustenance of the momentum and the possibility of a correction. While continued global liquidity and SIP inflows of nearly Rs 10,000 crore a month provide support to markets, a sudden outflow of money following the tapering of the Fed’s bond purchase programme beginning next month could take the steam out of the current rally. Existing investors who have been invested for varying lengths of time and are in different life cycles, need to adopt strategies that are suitable for them.

First, will markets continue to rise?

On January 21 this year, the Sensex closed above 50,000 for the first time. Nine months later, on September 24, it had gone past 60,000. And on Tuesday, it breached the 62,000 mark intra-day.

Despite the second wave of Covid-19 and concerns over its impact on the economy, the Sensex has had a strong run. But the rally has come under some pressure over the last couple of trading sessions — on Thursday, the Sensex closed at 60,923.

Having rallied over 8,300 points (nearly 16 per cent) since August 1, and over 13,000 points (27.5 per cent) since January 1, further gains in the market would be determined more by the earnings performance of companies and the pace of economic growth.

Experts say that since the fundamentals of the economy remain strong and there are at the moment only moderate fears of a new wave of infections, Indian markets are likely to remain strong — albeit with some correction on account of expensive valuations.

“There may be a healthy correction of around 10 per cent in the large cap index and around 15-20 per cent in the mid cap and small cap index in the near term but investors who are in for the long term should stay invested. Based on domestic fundamentals and continuing liquidity in Indian and global markets, the markets will bounce back,” said the CEO of a large mutual fund.

ICICI Prudential Mutual Fund said in a recent report that their long-term view on equity remained positive, but the medium-term view has turned cautious due to valuations moving higher. It however, advised investors who are underweight on equities to continue investing.

Should you move to hybrid funds?

While the question of profit booking is on many minds, the answers are different for different sets of investors.

Those who have started investing over the last one year — and those numbers are huge — and are now looking to book profits with an aim to re-enter after the correction, should keep in mind that they will have to pay short term capital gains tax (15%) on the profits, if the investment horizon is less than 12 months.

So, if they are looking to re-enter after a 10-15 per cent correction, it may not be a worthwhile exercise.

Investors should let their investments play out over a period of time, and avoid juggling.

Besides, one doesn’t know whether the markets will actually fall, and by how much. For young investors — both in age and those who are new to markets — it makes sense to stay invested if the investment horizon is longer than five years. Their equity journey has just begun, and they should not get nervous about an anticipated correction.

Investment advisors say that investors who have little or no exposure to equities should not look at market levels, and should start and continue their equity investments through systematic investment plans.

And what should veterans do?

Although a 10 per cent correction should not worry those who have been investing in mutual funds and stock markets for 20-25 years (they would have seen several ups and downs), the fact that their portfolio would have witnessed a significant jump over the last one year, could be unnerving.

It might be natural to be anxious over an anticipated correction if their portfolio is now skewed towards equity following the sharp rise in equity markets. They can now reallocate some of the equity funds to retain the balance.

“While principles of investment don’t change, if investors have seen that their fund allocation into equities has gone up, they need to reduce their equity exposure and rebalance. Also since there is some uncertainty in the market on account of Covid, one must keep three years of cash flows available with them,” said Surya Bhatia, founder, AM Unicorn Professional Pvt Ltd.

There are others who say such investors can look to move part of their equity portfolio towards hybrid funds — balanced funds or equity savings funds. Equity-oriented balanced funds invest over 65 per cent in equities and the rest in debt, and they can be considered by some investors.

More conservative investors can choose equity savings funds, in which 20-30 per cent of the allocation is in active (unhedged) equities, and another 40-70 per cent is in completely hedged equity positions and therefore, generates arbitrage or risk-free profits. Around 10 to 35 per cent of the portfolio is invested in debt instruments.

Both these categories of hybrid funds enjoy equity taxation and attract long term capital gains tax of 10 per cent (holding period of more than 12 months) on gains of over Rs 1 lakh in a financial year.

What advantage do hybrid funds have?

Investment advisors say that the hybrid funds would be best suited to navigate the current anxiety of investors who are overweight on equities. While hybrid funds are conservative and limit exposure to equities, they also allow investors to participate in any upside that the markets may offer.

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