Desist from thematic and sector funds; lower midcap, smallcap fund exposure.
Equity investors took a logical step as soon as the markets rose close to the peak of 2008 – they booked profits. Many were waiting for their portfolios to recover from the losses incurred during the stock market correction two years ago. However, many others had a successful turnaround, according to wealth managers.
Realising your gains is a smart move. This rally, however, not only gives you an opportunity to recover losses, but also to consolidate investments and correct earlier mistakes. For example, there are chances that you had opted for a unit-linked insurance plan, or Ulip, for investment, only to realise later that it was an expensive option.
The market levels rose sharply in the past two months. But, not all companies were lucky to be a part of this euphoria.
Chetan Tandel has a portfolio of 15 stocks. While he booked profits on banking and finance stocks which gave him handsome returns, his telecom, real estate and auto ancillary shares are still at half the price he paid to buy these towards the end of 2007. He does not know what to do with the laggards.
“Such investors need to look at the potential of a sector herein. I will advise him to sell the smaller companies in sectors which have potential, and invest money in sector leaders. If he already has leaders in his portfolio, it will give him an opportunity to lower the average investment price,” says Om Ahuja, head-wealth management & strategy, Emkay Global Financial Services.
For example, Tandel can retain telecom and auto ancillary stocks in his portfolio. But, real estate stocks are difficult to comprehend. Sales of houses have picked up, and so has the valuation of land banks. This movement, however, is not reflected in their stock prices. He can sell real estate stocks and plough the money back in sectors he understands.
Investors have a knack to shift their brokering accounts, as soon as another company offers a cheaper brokerage and lower annual charges. However, they continue to pay maintenance charges for the multiple trading and demat accounts.
“The brokerage charges do not matter if the investor does not churn shares regularly. An investor should opt for one that has better services such as faster online trade, immediate execution of orders, etc,” says Mukesh Dedhia, director, Ghalla Bhansali Stock Brokers.
Consolidating your account trading and demat account will help you keep a track of your shares and the maintenance charges.
Many investors make erratic investments in mutual funds and never redeem these. Suma Nayak has been investing for more than eight years and has 12 funds in her portfolio. Some of these were lump sum investments and have more than Rs 10,000, yet others were made through systematic investment plans, but only for a year.
“She must redeem equity-linked saving schemes that have completed the lock-in period, withdraw from thematic funds, and transfer the money to a liquid fund. She can start a systematic withdrawal plan from the liquid fund to diversified equity funds and restrict the number of funds to four-five,” says Malhar Majumder, a certified financial planner.
During the bull run of 2007-08, investors had put in large sums in thematic mutual funds, as their returns were way ahead of the broader market indices. For example, during the two-year period of 2005-2007, infrastructure funds yielded stellar returns. ICICI Prudential Infrastructure had one-year returns of 103.61 per cent between December 2006 and December 2007.
At present, banking exchange-traded funds are performing like infrastructure funds. Financial planners say a person must use this rally to set the allocation right. Restrict your exposure to thematic and sector funds, say 5-10 per cent of your portfolio, and lower your midcap and smallcap fund exposure.
The existing products have restricted charges and higher insurance cover. Earlier, Ulips had a high fee structure, wherein over 30-40 per cent of the premium was deducted even before an insurance company invested the money. And, charges in some products continued over the long term.
In the current market rally, there are chances of your investment being either equal to or more than the premiums you have paid so far. If this happens, the next thing is to look at the fees that your insurance company is charging annually, and also surrender charges. “An investor should surrender the policy if the annual charges, except mortality fee, are more than 2.5 per cent and surrender charges are waived. Shift this money to an equity-diversified fund and buy a separate term insurance,” says Surya Bhatia, a certified financial planner.
Avoid surrendering the policy if the penalty is high, and the premiums are not recovered and/or the charges are lower than 2.5 per cent.