Investors should consider debt mutual funds, banks fixed deposits or high-rated corporate debt instruments, experts tell Sarbajeet K Sen.
Illustration: Dominic Xavier/Rediff.com
2019 promises to be an eventful one for investors.
Market observers and investment advisors believe the run-up to the elections and its results would have a huge bearing on how financial markets behave.
In general, the investment community is averse to uncertainties.
The biggest factor that will impact the Indian equity markets in 2019 is the general election, the results of which would come some time in May.
"The markets are expected to be extremely volatile in the run-up to the elections," says Rahul Agarwal, director Wealth Discovery/EZ Wealth.
While Agarwal feels the current view of the market is that the National Democratic Alliance may scrape through in the election.
However, a change in government could spook the markets.
"At this point given the price action in the market," says Agarwal, "it appears that political uncertainty is not priced in and the markets are in broad agreement that the incumbent government would get a second term."
"However, if the results are contrary to the market consensus, we can see a major selloff in the equity markets, market participants like predictability and a stable policy framework and any disruption to the status quo, therefore, will lead to a market correction in the immediate short term after the results," adds Agarwal.
S Sridharan, head, financial planning, Wealth Ladder Investment Advisors, agrees with Agarwal, but says the markets would soon focus on fundamentals after elections.
"The market will always cheer if there is continuity in government. Otherwise, it may witness negativity," says Sridharan.
"However, this will live for a short period. The corporate earning revivals could take the market to the next level," he feels.
While a major focus will be on the way the electoral battle moves, the market will also keenly watch other domestic and global developments.
These would include the interest rate movement and the Reserve Bank of India's stance on interest rates and the liquidity measures, how crude oil prices pan out, the rupee movement and inflation.
Global geo-political environment, the US-China trade war, and the US Fed's stance on interest rates are some other factors that certainly would have significant bearing on the Indian equity markets in 2019.
Historical data shows there is heightened volatility in the months immediately preceding the Lok Sabha election.
"Given the existing global macro headwinds, that is, trade war escalation, slowing global growth, US recession concerns and lingering concerns over RBI autonomy, there could be enhanced volatility environment and that may have a negative bias towards market performance in the near term," says Anil Rego, founder and CEO, Right Horizons.
Debt could play a major role in stabilising portfolios in the coming months.
Investors should consider significant exposure to fixed income securities for capital preservation, which could be debt mutual funds, banks fixed deposits or high-rated corporate debt instruments.
"Investors should increase their allocation into debt securities up to 40% of the portfolio for a moderate to low-risk profile," advises Agarwal.
"In the short term, interest rates are expected to go down though the long-term interest rate trajectory is unclear. It is therefore advisable to stay in short-term to medium-term debt instruments to minimise interest rate risk in a fixed income securities portfolio," Agarwal adds.
Rego also advises staying invested in the shorter end of the debt market.
"Debt essentially plays the role of a cushion. In a growth-oriented portfolio, debt works as a shock absorber. In a portfolio biased towards income generation, debt plays the crucial role of delivering stable gains and also has to minimise capital loss," says Rego.
"For short-term goals, it is always wise to keep the investments in safe investments like bank deposits, liquid or low-duration or arbitrage funds," adds Rego.
He advises existing debt investors to look at reducing their exposure to long duration bond funds and credit funds and that the focus should be on debt funds with shorter maturity profile and extremely good credit quality portfolio.
"If you are investing in debt for stability, invest in debt funds that stick to government securities, treasury bills and top-rated PSUs only," adds Rego.
A good investment portfolio should have a healthy mix of equity and debt keeping.
The portfolio mix, however, should be based on one's risk appetite and market situation.
Agarwal feels that given the likelihood of high market volatility, an ideal portfolio for 2019 should have a higher fixed income component.
Equity exposure should be largely allocated to select large-cap stocks, along with diversified mutual funds.
Some capital can, however, be assigned to select quality mid-cap stocks that have taken a significant beating in 2018.
In view of the likely heightened volatility, the primary focus of investors should be on risk minimisation and capital preservation, especially during the first half of the year.
The most efficient way for investors to minimise portfolio risk in 2019 would be to invest systematically at regular intervals.
"Systematic investments can be made through mutual fund SIPs. If an investor chooses to participate directly in the markets, s/he should buy select good quality stocks at regular intervals to improve the average cost of buying," says Agarwal.
"Investors should also focus on diversification to mitigate the volatility in a specific sector," Agarwal advises.
However, while reworking one's portfolio based on current events or likely future developments, one should always keep financial goals and risk-taking abilities in focus.
Thus, the equity market is not the place to be if you are easily spooked by market volatility.
In case you are uncertain, the best recourse is to take help of a qualified advisor.
"A much easier job is to outsource such complicated decisions about asset exposure to asset allocation funds that have a formula based approach," says Rego. "Dynamic asset allocation is a job best left to experts."