The Hindu Business Line : Fund Talk

I have made big gains on my portfolio of equity funds over the years. But with the stock markets correcting and turning so volatile, I am wondering if I should I sell my equity funds and switch to some other investments. Please advise.

The decision will depend on what proportion of your overall savings is invested in equity funds and your return expectations on savings for the coming years.

If your equity investments are carrying substantial gains now because of stellar returns over the past four years, re-assess your portfolio to see what proportion of it is now invested in equities (both stocks and equity funds).

As an investor, you may already have some idea of the asset allocation (mix between equity, debt and other investments) that best suits your risk and age profile.

Investors in their 20s may allocate 70-75 percent their portfolio to equities, but this proportion should decline steadily with age (say, to 60 per cent in your 30s and 50 per cent in your 40s and so on). Your equity exposure will also hinge on your investment goals.

For those seeking higher returns (say, 12-15 per cent over the next 5-10 years), a higher equity exposure may be necessary to attain those goals. Therefore, you may consider selling some stocks and equity funds, if you find that the equity portion of your portfolio has swelled much beyond your “comfort zone” after recent gains.

Embark on a rejig of your portfolio only after you evaluate it thoroughly and separate good investments from the ones that have not lived up to their initial promise.

All of us usually have a few investments in our portfolio that we bought on impulse or without adequate research or conviction. These should be the first stocks or funds that you should sell at this juncture.

If your intention is to de-risk your portfolio to some extent and protect your gains from a market correction, we would advocate selling individual stocks ahead of equity funds (assuming the latter are funds with a good track record).

This is because an equity fund holds a portfolio of several stocks and as a result of diversification, may survive a market decline better than some of your individual stocks(however, do note that equity fund NAVs will also take a knock if there is a sharp decline in equities).

Unlike stocks, where the onus of profit booking is on you, in an equity fund, you can count on the fund manager to constantly assess market conditions, book profits and re-position the portfolio to take advantage of new investment opportunities. There are also other means to reduce the risk that your mutual fund portfolio carries:

You could switch from equity funds to balanced funds with a good track record (HDFC Prudence, Magnum Balanced are good options) to add a debt component to your portfolio.

You could switch from theme/sector funds to diversified equity funds to spread the risk across sectors.

You could switch from mid-cap oriented funds to those with a flexicap mandate, the latter’s returns may be less volatile.

Finally, during your rejig exercise, remember to evaluate your equity funds on the basis of their track record over bullish as well as bearish phases in the stock market.

Have a larger weight in your portfolio to funds which have survived both phases relatively well in the past.

Aarati Krishnan

(Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.)

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