Is it time to book profits in equity and deploy funds elsewhere? Arun Kumar answers

" The starting point is fairly simple that whenever there is an all-time high, there is a natural sense of unease for most of us because usually you hear the fact that you need to buy low, sell high," says Arun Kumar, FundsIndia.com.

So, time to rebalance a strategy, maybe that one should be adopting in their portfolio from time to time. But then right now, what kind of rebalancing and revamping in the portfolio are we talking about? Obviously, a lot depends on the kind of goals you have lined up with. But then, if one is really heavy in some department of equity, do you think it is time to just maybe book profits and deploy that fund somewhere else?
The starting point is fairly simple that whenever there is an all-time high, there is a natural sense of unease for most of us because usually you hear the fact that you need to buy low, sell high.

So, the moment that you hear sell high, you kind of tend to associate with the all-time highs. And generally, there is this unease that there might be a market fall after this. And you add to the fact that the last four times, almost for one and a half years, the Sensex has kind of got stuck in that 60,000 mark.

So, every time it comes to the 60,000 levels, there is a 10-15% correction. So, we had four times where it touched 60000-62000 then again it fell. So, this time again, most people were expecting probably for the same pattern to repeat but again, it has overshot that.

So, the first level of understanding would be that the all-time highs are nothing to be worried about because if you technically think about it, most of us would say I would expect say around 10-12% from it.

So, let us take 12%. In other words, you are saying that the Sensex or the Nifty should double every six years. So, that is what 12% actually means in terms of the absolute returns. So, which means you are saying 60,000 should inevitably go to 1,20,000 let us say at 12%, in other words, you are saying in six years it has to go to 1,20,000. In another six years, it has to go to 2,40,000. So, which means net-net, it is impossible for the Sensex or the Nifty to grow without hitting all-time highs. So, for any growing asset class, be it gold or real estate or equities, all-time highs are a given. So, the second most important point is we also did a simple analysis of the last 23 years.

We found that on average, if you only invested in all-time highs, your average one-year returns were close to 14%. And 50% of the times, you made more than 15% returns after all-time highs. So, there is nothing to be really worried about an all-time high per se. And usually, the way it works is that it gets stuck at all-time high levels for some point in time. Then it again breaks out, cutting a lot of all-time highs and again the market. So, this happened between 2008 and 2013 where it was more or less stuck, the Sensex was stuck at the 20,000 levels. Then it shot up to 40,000 in 2018. And again, it got stuck at 40,000 levels for probably 2-3 years. And then after that, it is now at 60,000. Probably, the next level will be much higher. So, overall, the breakouts happened. But we do not know whether this is a breakout or not.

So, clearly, there is no time to even time the profit-taking part also, right? So, how can one go about it then?
Yes. So, broadly, the idea would be that do not try to come out or get in based on the all-time highs. I think a simple idea would be that whatever is your asset allocation, say you are 70% equity or you might be 50%, just make sure you give it a band of plus or minus 5%.

So, right now, because of the market moves, if you are, say, at 76% or 77%, maybe you should bring it down to 70%. But if you are, say, instead, due to the market raise, you are only at 74%, still not broken that 5% cut-off you can continue with the existing allocation.

So, my sense is give it a 5% band. And as long as it is not exceeding your original allocation by 5%, you do not need to rebalance. If it exceeds, move some equity and then bring it back to debt. One is that. The other thing how you can do it is the incremental money, if you have your SIPs coming, put it more towards debt so that overall you bring the equity allocation back to the original. So, these are two things that you can do.

So you are suggesting that one can increase the amount in debt by booking profit from their equity portfolio but then what about reinvesting it? One should be doing it from debt itself now?
So again, the concept is fairly simple that you look at what your current allocation is. So let us say you started with the intent that you have to maintain around 70% equity. Right now, if it is exceeding that by 5%, then alone rebalance it back. But if not, you can still continue with the original. You do not need to make any incremental changes. This is not the time to go either underweight on equity or overweight on equity.

So in that sense, if at all, your current equity allocation has probably moved up to 76% or maybe cut the 5% or more that excess allocation of say 5% or 6%, you can move it into debt right now. And if you have incremental allocations, you can realign in such a way that the majority of it goes to debt so that overall it brings that 76% of equity slowly back to the 70%. But do not go below 70%. So do not go underweight but just make sure that you are just rebalancing it back and building it close to that. 70%, I am saying for an example, it can be 50% or it can be 30%, depending on what that current asset allocation split of that investor is.


So are we also talking about within equity, are we also applying the same rule maybe to book profit from midcaps, small caps?
Yes, see we are not in the camp that you will have to currently go underweight on midcaps or small caps. Generally, at a core portfolio level we don't use the small caps for us internally. So we use small caps only as a tactical portion. So broadly, the way we kind of approach is that within equities, we look at it in terms of five different buckets. So the first bucket would be the growth at reasonable price style.

And then the second style would be the value or contrarian style. The third would be the quality style. The fourth would be mid and small-cap bucket and the fifth would be the global bucket.

So as long as you are 20% in each of these buckets, I think overall you have a good diversified portfolio. So if at all you are in excess in one of these styles or you have too many funds or you have an extreme overweight in say, a particular AMC or a particular fund, then this is probably a good time where you can simplify your portfolio and kind of get it diversified across the five different styles. So I think this is a good time where you can simplify your equity portion.



And what about across asset class? I mean, equity debt we have spoken about, but then what if you have other asset classes also in your portfolio?
So broadly, the way we kind of look at it is that equity will be your asset class which kind of gives you good returns over long periods of time. But again, it comes with the volatility that 10%-20% is given every year and 30% to 60% is kind of to be expected every 7-10 years.

So gold and debt is more stable. Gold is more like an anti-equity portfolio where generally when there is a crisis or equity does not do well, gold tends to do well. So overall, my sense is whatever is your starting allocation say you are 70% equity and another 20% into debt and say 10% into gold, you can continue that same 5% PAT and make sure that all these 70 is within that 65 to 75.

Similarly, debt is between 15 to 25 and again, gold is between, say, 5 to 15%. So if you maintain that, if there is any break, I mean, anywhere there is a deviation of more than 5%, then you can either reduce or increase based on that. So I think overall, at different asset allocation, if you can keep this simple band, it should more than be enough at the current juncture.