One year since the COVID lockdown, investors have had quite a wild ride. Just as retail ETF flows into Gold accelerated, the yellow metal went into an extended bearish phase, correcting by nearly 20% from its 2020 highs. Equities rallied with such astounding ferocity that fence sitters were left… well… sitting on the fence! Debt investors faced consternation as yields jumped sharply in Q1 CY 2021, resulting in negative returns from most debt funds. After tapering off in February, the COVID situation seems to have exploded within a month. In such a dynamic and rapidly evolving scenario, what should investors do with their Mutual Fund portfolios? Here are some smart and simple measures that you can take.
Equities – time to go light
Last year’s stock market rally has not been supported by fundamentals. Although the massive cushion of liquidity has kept risky asset prices elevated until now, it’s likely that inflationary concerns will result in a more hawkish stance from the RBI going forward. At the same time, we may see a flight of FII capital if the global mood turns risk-off. A deep cut in equity prices across the board cannot be ruled out at this stage. It would be a smart move to reduce equity exposure by around 50% - 75%, and immediately start weekly STP’s (systematic transfer plans) back into them over 3,6 and 9 month periods.
Gold – increase allocations
With U.S debt mounting and inflation rising, the dollar is quite likely to remain under pressure for the immediate future. This bodes well for dollar denominated gold, which would rise in value. If action is taken in the near future to tame surging US bond yields, gold will receive a shot in the arm. Additionally, when the risk on sentiment recedes, we could very well see the yellow metal rallying once again. On the technical front, both US and Domestic gold are showing some very strong support in the 1700$/oz range, and may be ripe for a reversal. This would be a good time to allocate anywhere between 20% and 40% of your portfolio to gold for the remainder of 2021. This would also act as a natural hedge to your equity holdings.
Debt – temper your expectations
Debt markets have had a rough ride in 2021 until now with yields spiking across the board, first due to the long-term variable reverse repo operations, and then amidst the panic surrounding SEBI’s move to change norms for AT1 and perp bonds. One should also read between the lines in the forward guidance given in the recent PC meet which, although accommodative, dropped the “timing” element (1-2 years) that were present in the previous guidance. We may even see rates being hiked in the latter half of the CY, if inflation prints remain high. It would be advisable to not take any risks in your fixed income portfolio, as the interest rate situation remains highly unpredictable and dynamic. Stick with short term debt funds of high credit ratings, or liquid funds – which may get a boost when short term rates increase.