Where to park your equity profits

Of late, a chorus of market voices have piped up to say that global stock prices are in bubble territory. The RBI recently described the Indian stock market as a bubble. Bubble or no bubble, there can be no disputing that after the breathless rally of the last five years, Indian stock valuations are very expensive. If you’re sitting on hefty equity gains or high equity allocations, this makes it prudent to book some profits on your equity portfolio. But a practical problem that stops many folks from booking equity profits is not knowing where to invest those gains.

We suggest dividing your gains into three buckets and recommend suitable investment products for each bucket.

Capital protection bucket

If the stock market rally has made a significant difference to your overall wealth, you may want to convert some of those paper gains into real money, to meet your short-term or long-term financial goals. In this case, you should primarily look for safety of your capital in re-investing your equity gains.

Market-based bond investments today carry both credit and duration risk (the risk of default because of Covid and the risk of capital loss from rising rates). Indian government-backed sovereign instruments offer protection from both.

If you are looking to set aside equity gains towards long-term goals such as retirement that are at least seven years away, GOI’s Floating Rate Savings Bonds sold by RBI on tap via leading banks, offer the rare combination of good returns with capital safety. The bonds’ floating interest is pegged at a 35-basis point premium to the prevailing rate on the National Savings Certificates. For the April-June quarter, this interest was 7.15 per cent.

The floating rate makes this a good bet in a rising inflation/rate scenario. The only disadvantage of the bonds is that it offers no compounding and only pays out interest. The bonds also carry a 7- year lock-in and are not tradeable. A second sovereign-backed option is the five-year National Savings Certificate (NSC) from India Post. While rates are reset quarterly, you get to lock into a specific rate for five years. NSC currently offers lower rates of 6.8 per cent than the GOI savings bonds. But it allows accumulation of interest and has a shorter lock-in of 5 years.

For goals that are 5-7 years away, passive debt ETFs that invest in government securities are good options. IDFC Gilt 2027 Index Fund, IDFC Index 2028 Index Fund and Nippon ETF 5-year Gilt ETF are such funds that can get you to a fairly predictable return by those target dates.

If you need the money within the next 3-5 years, you can consider gilt mutual funds with a short maturity (there aren’t too many of them but Axis Gilt is one) or PSU & Banking funds with short maturity (Axis, UTI and IDFC have less than 2-year average maturity). These may not be as safe as sovereign instruments, but do offer liquidity with a fair degree of capital protection.

Diversification bucket

Some folks may book profits in their equity holdings not because they need the money to meet any goals, but simply to de-risk their portfolios. If you work to a pre-decided asset allocation pattern (as all investors should) and have seen your equity allocations overshoot your comfort level, you should invest your equity gains in long-term options that help you diversify from equity risks.

Two options to consider are Sovereign Gold Bonds and REITs. Gold is one asset class that has lagged during the concerted rally in stocks, bonds and commodities recently. It also tends to deliver gains when stock prices tank. Sovereign gold bonds, bought either from primary issuances by RBI or in the secondary market, therefore present a good option to park some of your equity gains. Gold ETFs can be an alternative.

Real estate too has delivered rather muted performance in India in the last few years and therefore makes for a good diversifier. REITs or Real Estate Investment Trusts are a good proxy for commercial real estate investments, through a regulated, divisible and liquid vehicle. Listed REITs such as Embassy Office Parks and Mindspace own a portfolio of office complexes from which they earn rents from high-quality clients.

Liquidity bucket

You may have every intention of getting back into equity markets when a big correction materialises and valuations cool down. Such corrections and also the reversals from them, can be swift and sharp. Re-deploying your money into equities after such corrections would be impossible if you lock all your equity gains into instruments such as GoI bonds, NSC or even SGBs.

To keep powder dry for such a re-entry, apart from Gilt and PSU/Banking debt funds mentioned above, Liquid Bees or other Liquid ETFs (ETF which invest only in safe money market instruments) are a good option. These funds carry a constant NAV while declaring their returns as daily dividends, which are credited as fresh units in your demat account.

Fixed deposits with leading banks, which can be instantly liquidated online, are just as good for this purpose. These aren’t high-return or tax-efficient options but keep your money safe for quick re-deployment.

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