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How to protect your equity gains in a volatile stock market?


After a good run in 2021, stock markets have crumbled under multiple pressures – like the Russia-Ukraine war, rise in crude oil prices, steep rise in inflation, rise in policy rates, etc.

Although, moving up and down is the inherent train of stock markets, you may wonder how to take advantage of the market volatility to maximise the gains.

How to maximise gains by keeping gains intact

The simple logic to maximise the gains is to invest in low markets and redeem in high markets.

However, it’s easier to say, but nobody can predict the peaks and bottoms and can only rue the missed opportunities once the peaks and bottoms are passed.

So, the best thing you can do is asset allocation as per your need and ability to take risks and by doing periodic portfolio rebalancing.

Asset allocation and periodic rebalancing will also ensure that you protect your gains in volatile markets.

Asset allocation

You may do asset allocation manually or leave it to professional fund managers by investing in hybrid mutual fund (MF) schemes.

How to do asset allocation by yourself

As per your need to take risks to meet financial goals and your risk taking capacity, invest in equity and debt funds. The ratio may vary person to person from 10 per cent in equity and 90 per cent in debt to 90 per cent in equity and 10 per cent in debt.

To reduce the impact of market risks, it’s better to invest in equity funds through systematic investment plan (SIP) and to keep the ratio of investments in equity and debt, proportionate investment in debt through SIP as well.

Portfolio rebalancing

Only investing in equity and debt in a pre-decided ratio is not enough. You have to check periodically if the ratio is intact or getting skewed.

In case the ratio gets disturbed, you have to rebalance it to restore the parity between equity and debt in the pre-decided ratio.

The rebalancing may be periodic – like once in a year, if needed – or it may be based on the quantum of distortion in the ratio – like in case a 75:25 ratio becomes more than 85:15 or 65:35.

Too frequent rebalancing may attract exit loan and/or capital gain tax, resulting in dilution of the gains from rebalancing.

The need for a rebalancing mostly arises due to fluctuation in the equity part. When the markets go up sharply, the equity portion becomes higher and in case of a market crash, the equity portion becomes smaller than the relatively stable debt part.

So, when you rebalance in a high market, you book profit that reduces the impact of subsequent fall in market on your portfolio, as you have already shifted a portion of equity to debt.

Similarly, in a low market, you shift money from debt to equity to restore the balance, resulting in investment in equity in low markets. Moreover, the asset allocation ensures that you have money reserved in debt to invest in equity in a low market.

Thus, through asset allocation and portfolio rebalancing, you may maximise your gains by investing in low markets and redeeming in high markets.

Rebalaning through hybrid funds

As per your need and capacity to take risks, you may invest in aggressive or conservative hybrid MF schemes and leave the hassles of asset allocation and portfolio rebalancing on the professional fund managers managing the respective schemes.

By doing the periodic rebalancing, the fund managers would do their best to maximise your return.




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