Risk Reduction in Equity

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In the last 6 months, Indian Equity has experienced the highest volatility in its history. Sensex fell from ~41500 to ~26000 and now has bounced back to ~39500 level. The same can be seen as under:

Sensex chart

Market corrected due to Covid in March, 20. Since then it has recovered primarily because of global liquidity and also because equity market is forward looking.

We took advantage of this market volatility by buying equity when Sensex was at ~35000 and ~28000. Also, the monthly SIP & STPs of last 6 months have got invested in equity when market was down.

We feel that equity market may experience some volatility in short term because of following reasons:

  • US Presidential elections on 3rd November, 20
  • There is a risk that recovery of Indian economy and corporate earnings may not happen as anticipated.
  • Equity market has gone up by 50% from the bottom of March 2020 in just 5 months. This is very fast.
  • Risk of reduction in global liquidity

We feel that the worst is behind us and even if any correction happens then it won’t be deep like what we saw in March, 20.

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However, we continue to be bullish on Indian Equity from a long term perspective and feel that it will give high returns because of following reasons:

  • From economy perspective, every day is going to be a better day because we will be getting closer to vaccine and unlocking of economy will continue.
  • The valuations are fair and not expensive. Specifically, large cap is fairly valued and mid & small caps are undervalued.
  • Indian equity market has not given meaningful return in last 10 years and mean reversion may happen soon.
  • Low commodity prices, low interest rate, devalued rupee and ample liquidity is good for the Indian economy and will help in faster recovery.

Keeping the above scenario in mind, it is recommended that we reduce the risk in our equity portfolio by taking following actions:

  • Sell 10% of current equity exposure.
  • Redeploy the above redemption proceed back in Equity in a staggered manner through 10 months STP
  • Reduce exposure in Indian large cap and US funds (If completed 3 years)
  • Redeploy through STP in Indian focused, multi cap, mid cap, small cap and emerging market funds.
  • Only those equity funds to be exited which are exit load free and have low tax.
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There is also a possibility that we may not see any correction and equity market continues to go up. We would like to emphasise that this is an equity risk reduction strategy which will help us in reducing the volatility in portfolio and may also help in getting better return if market corrects.

Happy Investing

Alpha Research



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