It’s another new All Time High 🚀

 

Suffer the pain of discipline;
Or suffer the pain of regret!

: Unknown

 

 

The world stock market cap hit a new all-time high (ATH) of ~$100 trillion last week. Closer to home Nifty 50 and Sensex reached new ATHs as well. If you kept investing through the “fear” of Mar-Apr and continue to do so today then first congratulate yourself. You have taken a big leap towards long term thinking and investing.

However, new ATHs bring a new set of questions and doubts in the investing community. We tackle a few such FAQs today.

 

 

I have too many equity MFs / stocks in my portfolio. Should I consolidate now that all my investments are in the money? 

The naive answer is “yes, this is likely the best price you will receive for some of these equity investments so please consolidate.” While we have been strong proponents of consolidation and have written extensively on naive diversification, consolidating at market highs attract capital gain taxes.

And we do not like taxes.

We have been vocal about consolidation during market falls, but we are always hit back by “I don’t want to sell at a loss“. To which we say, so what, at least you won’t pay any taxes to consolidate. If you had consolidated in Mar – Apr you would have paid none to marginal capital gains taxes. Now that all MFs and stocks have rallied the same consolidation can attract hefty capital gains taxes. So let this be a lesson learnt, it is more optimal to consolidate in a market correction.

 

Is “Kuvera Smart Beta Fund” a good New Fund Offering (NFO) to invest in? 

We are not an AMC and are not launching any fund yet, but it can not be denied that market highs bring with them a bunch of NFOs. In the fund management eco-system, NFO’s serve an interesting purpose. Market highs are when investors are feeling bullish, so it is easier for AMC to gather enough assets to make an NFO viable. NFOs also keep older and more mature funds in the same segment on their heels by increasing competition. Competition is good, but that cannot be reason enough to add an NFO to your portfolio. Further, if you add enough NFOs in your portfolio, soon you will be asking us the first question about consolidation. The bar to add an NFO should be the same as the bar to add another fund to your portfolio – the added fund should have low overlap with the existing portfolio and provide an ucorrelated risk-return benefit to the portfolio.

 

The future looks bright, should I add more equity exposure?

Stick to your asset allocation. When the market falls your asset allocation will require you to sell debt and buy equity. Similarly, when the market rallies your asset allocation will require you to sell equity and buy debt. Asset allocation is the counterweight to the prevailing trend. We advocate a percentage deviation based asset allocation rebalancing and right now it will more likely than not signal to sell some equities and buy some debt. There is a school of thought that your re-balancing can be regime based or levels based. If the market rallies x% do this and then if it rallies y% do that. Our advice is to keep your re-balancing simple – don’t build these complicated if-then structures for rebalancing. They rarely work outside of the backtest they are optimized on and are a pain to track and execute timely.

 

These are the top-3 questions we are being asked today. What’s on the top of your mind? Let us know.

 

Happy investing,
Gaurav
CEO | kuvera.in | @rustapharian

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Do not wait for February / March of FY21 to harvest taxes. Do it as early in the financial year as possible – as happened in FY20 you may not have gains later to harvest!

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Interested in how we think about the markets?

Read more: Zen And The Art Of Investing

 

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