Despite witnessing some consolidation in the past few days, the Indian equity market continues to trade at all-time high levels. However, amidst the exuberance, there are reasons to be cautious about your investments.

Here is why…

Even after a year since COVID-19 began to spread India and the world continues to reel under the impact of the pandemic. Countries such as USA, Brazil along with many European countries have seen no respite in curbing the virus yet.

On the other hand, after reaching a peak of nearly 1 lakh new cases in the month of September, India witnessed a massive drop in cases in the subsequent months. But this success wave hasn’t lasted long, on Sunday, India added 14,199 cases, making it the fifth consecutive daily jump.

[Read: How to Make Your Finances Pandemic Proof]

Several states in India have once again witnessed a spike in cases over the past few days, raising concerns regarding another wave of infection in the country. The total caseload now stands at around 1.1 crore. Kerala and Maharashtra continue to be the worst affected states, while other parts of country too have witnessed surge in net addition.

Recently, the Maharashtra government imposed partial lockdown in some parts of the state and banned all kinds of political, social, and religious gatherings to curb the rising cases. Besides, it has warned of stricter lockdown if people do not follow COVID-19 measures such as wearing masks and observing social distancing.

Impact of recent surge in COVID-19 cases on your investment

A second wave of infection and possibility of renewed lockdown restrictions will come as a severe blow to various economic activities that had just started to emerge out of the pandemic crisis. Moreover, it is likely to delay the return to normalcy, thereby affecting consumption growth.

Notably, one of the main reasons for the sharp rally in the equity market was the expectation of economic recovery as well as rebound in corporate earnings on the backdrop of receding COVID-19 cases. If the economic recovery does not take place as expected, the equity market could once again turn highly volatile.

[Read: Market May be Headed for Correction. Should You Book Profit in Equity MF Schemes?]

Fortunately, the vaccination drive against COVID-10 has begun and India is set to begin its next phase from March where around 25 crore beneficiaries will be inoculated. Furthermore, India’s recovery rate continues to be among the highest in the world, while reports of the fatality rate have not registered an increase. Thus, the impact of the second wave may not be as harsh as compared to the previous one.

How to invest in the current scenario?

The equity market is at an all-time high level and there is a possibility that it may have run ahead of fundamentals, meaning the downside risk in case of any adverse event could be high. Apart from the resurgence in COVID-19 cases and high market valuations, watch out for global cues that could pose a threat to Indian equity market.

Given the unpredictability of the world we are living in, it is important to create an ‘All-Weather’ portfolio to beat the impact of volatility.

To create an ‘All-Weather’ portfolio, diversify your investment across categories, sub-categories, and investment styles based on your risk appetite, financial objectives, and investment horizon.

Since no two asset classes move in the same direction always, it makes sense to invest across equitydebt, and gold, along with some portion on cash. For example, amidst the uncertainty looming in the year 2020, gold clocked highest returns, while the returns from equity and debt diminished. Remember, the right asset allocation is the cornerstone of investing and serves as a strategy in itself.

When you build a diversified portfolio of equity funds, opt for the ‘Core & Satellite’ approach to investing — a time-tested strategy used by successful investors. The Core holdings will let you focus on the stable schemes with a long-term view; while the Satellite holdings enable you to capitalise on short-term opportunities.

Your ‘Core’ holding should comprise around 65%-70% of your equity mutual fund portfolio and consist of Large-cap Fund,  Multicap/Flexicap Fund, and a Value Style Fund.

Whereas, the ‘Satellite’ holdings of the portfolio can be around 30%-35% comprising of a Mid-cap Funda Large-cap & Mid-cap Fund, and an Aggressive Hybrid Fund. If your risk appetite permits, you may also consider investing a small portion in Small-cap Fund and  Sectoral/Thematic Funds.

Here are the benefits of following the ‘Core & Satellite’ approach to investment:

  1. Provides your portfolio with optimal diversification
  2. Reduces the need for constant churning of your entire portfolio
  3. Reduces the risk to your portfolio
  4. Helps you benefit from a variety of investment strategies
  5. Allows you to create wealth, cushioning the downside
  6. Holds the potential to outperform the market

The core and satellite investment strategy may work for you in 2021 and beyond.

When you invest in a diversified portfolio of equity funds, it will be beneficial if you stagger it over time, preferably through the SIP route. Note: If your financial goal is nearing (next 2-3 years), you would be better off gradually redeeming your investments in equity funds and reinvesting it in safer avenues.

Lastly, ensure that you conduct a periodic review of your portfolio and rebalance if necessary.

This article first appeared on PersonalFN here

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