Focus on asset allocation as interest rates rise
Guest Column: Rahul Mantri, Chief Financial Planner Midas Touch

With interest rates rising and markets scaling new highs investors need to relook at their portfolios and make changes in them so that they can face the challenging times going ahead.

The last calendar year was a very good one for equity mutual fund investors. With the new changes in the budget 2018 and upcoming elections in 2019 equity investors have become sceptical in recent times.

We saw investors shifting from high risk mid and small caps to frontline stock. This was evident as the midcaps and small caps corrected sharply but the frontline indices like the NIFTY and the Sensex continued making new highs.

The trend clearly shows that smart money still prefers equity as an asset class but has chosen to be conservative within the asset class. Smart investors are also factoring possible populist measures by the current government in the next budget for 2019. This may not be taken positively by the markets and may add to the nervousness.

With this backdrop, small investors too need to change their investment strategy. New investors who wish to enter the markets at this point of time may choose to invest 40 to 50 per cent of their portfolio in open ended accrual debt funds or floating rate funds. Investing in floating rate funds would mean that investor’s risk to rising interest rates will be minimal. The remaining 50 to 60 per cent can be deployed in pure diversified equity funds which do not have any restriction of investing in stock of any specific market cap.

Thus, instead of investors themselves taking the call regarding allocation in large, mid and small cap stock, they can transfer that responsibility on the fund manager who is better equipped to take the call and act faster when the situation changes in future. For instance, if the 2019 elections results are favourable, the fund manager of a diversified equity fund can take some aggressive bets and vice versa. 

Investors may also increase or decrease their allocation towards equities once the cloud of uncertainty is cleared after the election results are out.