Understanding the Bullish Market Surge
With the Sensex crossing the 80,000 mark and Nifty over 24,000, investors are elated as their faith in equities has been rewarded. The first six months of this year have seen a massive net inflow of ₹3.93 lakh crore in open-ended mutual funds. In June alone, SIP (systematic investment plan) inflows exceeded ₹21,000 crore. However, this market exuberance has raised concerns among investors and analysts alike. They believe that stocks are trading at elevated levels and a correction might be imminent. Despite these worries, valuations are not overly inflated due to robust corporate earnings growth. The price-to-earnings (PE) multiples of major indices are at their long-term averages.
Maintaining a Balanced Portfolio
Financial advisers emphasize that investors should not fixate on market levels but focus on their financial goals. Fluctuations in the Sensex, whether it drops below 79,000 or climbs above 80,000, will not and should not alter your long-term financial objectives. The steep rise in stock prices may have altered the asset allocation for some investors. For instance, if your allocation to equities was 50% a year ago and your investments matched the BSE 500's growth, your equity exposure would now be around 57%. Although a seven-percentage-point change isn't alarming, it is wise to periodically rebalance your portfolio to restore the original asset allocation.
“Investment success doesn't come from buying good things, but from buying things well.” - Howard Marks
The Importance of Rebalancing
Rebalancing reduces risk and delivers more stable returns, which in turn boosts investor confidence in equities. This is particularly crucial for new investors who have never experienced a bear phase.
The average investor is not very informed, so rebalancing becomes a challenge. When markets go down, many conclude that equity is not for them.
For those investing through monthly SIPs, rebalancing might simply mean redirecting new investments towards fixed-income instruments. For others, it could involve booking some profits in stocks and reinvesting the proceeds in fixed-income options.
Balanced Advantage Funds: A Viable Option
Investors who find it challenging to rebalance their portfolios might consider balanced advantage funds. These funds dynamically adjust equity exposure based on market conditions, booking profits when markets rise and increasing equity investments when prices decline. While these funds promise lower volatility, they may offer lower returns compared to more aggressive investment strategies. Nevertheless, they provide a disciplined approach to asset allocation, preventing emotional decision-making driven by market fluctuations.