The Indian equity market is expected to endure a turbulent year with the election creating volatility, leading to the market witnessing significant risks to the price-to-earnings (P/E) ratios. The current P/E ratios of BSE Sensex and NSE Nifty stand at 23.36 and 26.96 respectively, with the P/E ratio of BSE Sensex falling from 23.78 for FY17-18. Having a well-balanced equity portfolio in today’s market scenario is of paramount importance for wealth creation, which entails striking the right balance between stability and growth.
While the equity market in India generates double-digit returns, one needs to minimize the risks involved, while protecting the profits and principal, thus building a successful investment portfolio. One of the pragmatic approaches to ensure stability would be to opt for large-cap funds. Companies with large market capitalisation provide stability even during a bear market, and large-cap funds are particularly attractive for conservative investors.[1]
Here are a few ways you can balance the risk-reward tradeoff, thus attaining a proper balance of stability and growth for a high-quality equity portfolio.
Portfolio Diversification
Uncertainty is an integral part of investment. Thus it is important to ascertain the risk-bearing capacity before investing, and depending on your risk profile, you can diversify your investments among various asset classes. The fact that the correlations between different asset classes are not static boosts your returns, while minimizing the risks. It is imperative to understand the risk profile of each asset class, and make an informed decision about the asset allocation to protect your portfolio during market volatility. Portfolio diversification can result in wealth creation during bear markets, thus bolstering your investment portfolio.
Equity Investment
Equity investments tend to carry higher risk, but with a cautious approach through income, growth or value investing, you can leverage the current macroeconomic situation to attain greater returns.
-For those with low-risk appetite or seeking regular income, income investment provides you with the opportunity to invest in stocks that pay good quality dividends. Furthermore, the stock prices do not fluctuate much, and by investing in stocks whose dividend payments are spread out, you can generate regular stream of income from your portfolio.
-For those that can wait for considerably longer periods for returns, and have a relatively high-risk appetite, growth investment provides you with the opportunity to select and purchase stocks in companies that show faster growth rates. With an increase in the company’s revenue, the stock price also increases; however, it usually takes years to witness substantial returns.
-Similar to growth investment, it takes considerable amount of time to truly reap benefits of value investments. This includes purchasing shares that are currently overlooked by the markets. Over the long run, value shares of companies tend to surpass growth shares due to the volatility in such companies.
Equity Funds
Unlike direct investments, equity funds such as mutual funds ensure disciplined diversification, as the fund managers work within an institutional framework, ensuring a diversified portfolio that isn’t significantly impacted by the market volatility. Furthermore, by investing regularly, you will be able to save tax under the Section 80C of the Income Tax Act by investing up to Rs. 1.5 lakhs per annum in specific equity mutual funds.
The fact that the fund manager does the trading (buying and selling of stocks) further ensures that you do not incur tax liabilities. This makes equity-mutual funds an attractive instrument to get higher returns, while minimizing the risks due to the market movement. Different domestic and global factors, including the fall in rupee value, rate hikes and uncertainty over long-term capital gains tax in the budget proposal are expected to contribute to the market volatility in 2019, and finding the right balance between stability and growth is imperative to maintain a high-quality equity portfolio.
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