Market correction a chance to allocate more to equities, albeit gradually

Don't bet excessively on gold based on its recent rally as an early end to the Russia-Ukraine war could bring it to a halt

The end of the financial year is a good time to review your finances and make a few necessary tweaks. This review should include your investment, insurance and loan portfolio.    

Go heavy on large-cap funds

Unlike the consistent rise in the leading indexes witnessed since April 2020, the next few quarters could be volatile for the equity market. “Central banks and governments had offered monetary and fiscal stimulus respectively. This will be normalised this year. We are also seeing a lot of supply chain issues which have got compounded by the recent geopolitical developments,” says Manish Gunwani, chief investment officer-equity investments, Nippon India Mutual Fund.

Mid- and small-cap funds have outperformed large-cap funds over the past year. However, it would be prudent to have large-cap funds as your core portfolio allocation in the future. “Since volatility is expected to be high, it would be better to have a higher allocation to these funds. They are better suited for investors who want equity exposure without taking too much risk,” says Gunwani.

Inflation may affect the economy adversely in the short term. Over the medium to long term, however, the Indian economy is expected emerge from the short-term adversity caused by Covid, and the longer-term adversity caused by weakness in capex cycle. “We expect private capex to revive,” says Gunwani. Large-cap funds, he says, will benefit from these macroeconomic trends.

Investors shouldn’t ignore mid- and small-cap funds entirely. In a growing economy like India, these funds tend to outperform large-cap funds over the long term. Also, the mid- and small-cap segment offers investors a chance to participate in emerging sectors and business models.

However, to cope with the higher volatility expected this year, investors should limit their allocation to these funds (the exact percentage allocation should be commensurate with the investor’s risk appetite).

Opt for target maturity funds  

The Reserve Bank of India (RBI) is expected to hike interest rates this year, though geopolitical upheavals and their impact on growth could lead to a delay. “Rate hikes are likely to be gradual and limited in this cycle,” says Joydeep Sen, corporate trainer (debt markets) and author.

Investors should avoid longer-duration funds and stick to those having a shorter duration. “Corporates have managed the slowdown well since there has been no major default since February 2020. Investors who have the risk appetite may make a small allocation to credit risk funds,” says Sen.

One category well suited to the current environment is target maturity funds. “These funds have high-quality portfolios, so credit risk is taken care of. And if they are held till maturity, the investor also gets protected from interest-rate risk,” says Sen.

According to him, investors may also park money in small savings schemes, which are currently offering relatively attractive returns. However, they must be comfortable with the lock-in period in schemes, if any.

Realign your asset allocation

If you examine the calendar year returns of different asset and sub-asset classes over a longer period of time, you will find that different assets outperform in different years. “Predicting in advance which asset class will outperform is difficult, hence investors must follow a disciplined asset allocation strategy,” says Gunwani.

Check the asset allocation of your portfolio. “If the market correction has brought down your allocation to equities, and you have liquidity available, this may be a good time to make some extra allocation to equities, provided your goal is six-seven years away,” says Arvind A Rao, certified financial planner and founder, Arvind Rao & Associates. Given the uncertainty regarding how much more the market could correct, he advises investing in tranches – 25-30 per cent now, and more later.

Also check how much time is left for each one of your goals, and whether you are on track to achieve them. If not, extra allocations may have to be made. The same may have to be done if, for some reason, the timeline for a goal has changed and come nearer.

Investment in gold should not exceed 10-15 per cent of your portfolio. Don’t bet excessively on the yellow metal on account of the recent rally. If the Russia-Ukraine war ends, this rally could halt or even reverse.   

Are you adequately covered?

During your review, check whether you have sufficient term insurance. It must be at least 10 times your annual income.

If you own many policies, ensure that none of them has lapsed. Also check that your contact details in the policy are correct. “There are a large number of cases where the insurer wants to make a payout but is unable to contact the nominee,” says Kapil Mehta, co-founder and managing director, Secure Now Insurance Broker.

In policies where the existing nominee has passed away, the insurance company must be informed about the change of nominee.

In case of health insurance also, make sure that you have adequate cover. “If you live in a major city, you must have Rs 15-20 lakh worth of cover,” says Mehta.

Health plans with more attractive features get introduced every year. “Evaluate whether you need to port to a better policy,” says Mehta.

Another important point is related to pre-existing conditions. “If you have a pre-existing condition which is not listed in your policy, do so, or else it could become a cause for claim rejection,” says Mehta.

Plan loan prepayment  

During the annual review, go through your credit report. “Make sure all the payments you have done on loans have got properly recorded and there are no discrepancies in the report,” says Adhil Shetty, chief executive officer, Bankbazaar.com.

Go through your home loan statement to see how much you have repaid and how much remains. This is also a good time to plan prepayments.

“Check out what your lender permits. One lender may allow its borrowers to prepay as little one extra EMI a year. Another may allow a slightly higher payment with each EMI. Yet another may have a higher threshold below which borrowers can’t prepay,” says Shetty.

When you make a prepayment, you also get a chance to adjust your EMI. “Normally when you make a prepayment, your tenure comes down. However, you can also request the bank to reduce your EMI,” says Shetty. When you do so at the time of prepayment, it is not treated as restructuring (which affects your credit score).

If you are on an old loan linked to the marginal cost of funds-based lending rate (MCLR), shift to a repo rate linked loan as this is likely to bring down your interest cost significantly.

Make an early start

If you invest in Public Provident Fund (PPF), invest the entire amount for the financial year by April 5, assuming you have the liquidity. “Investing early will enable you to earn PPF’s attractive rate of interest (7.1 per cent currently) for the entire year,” says Rao.

Other tax-saving investments, like systematic investment plan in a tax saver mutual funds, should also commence at the start of the financial year. This will enable you to get the benefit of rupee-cost averaging. Leaving tax-saving investments for the year end results in a liquidity crunch.

Finally, review your household budget. “With inflation spiraling upward, you may need to make some extra allocations there,” says Rao.