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Rupeeting Core Rebalance - April 2022

April 2022

💡 Rebalance: (v) to change the amount or level of one or more things in order to improve a particular situation

Rupeeting’s Core Portfolios are all-weather portfolios, diversified across 5-6 asset classes. These come in 3 types, meant for 3 basic risk profiles - Aggressive, Balanced and Conservative.

Aggressive: 65-80% Risky and 20-35% Safe

Balanced: 40-60% Risky and 40-60% Safe

Conservative: 10-25% Risky and 75-90% Safe

We change the allocation between Risky and Safe, and of assets within those two buckets depending on market conditions to give you the most optimum combination for your money.

What Are We Changing?

We are making only 1 change in the strategy.

We are getting rid of all exposure to international stocks.

The gunpowder we get from removing international stocks, we are deploying in Indian equities - in the same proportion as earlier: 75% on large caps and 25% on mid caps.

Exposure to Debt, the proportion between Government Debt and Corporate Debt, and the exposure to Gold remain the same as earlier.

Why remove International Stocks?

The RBI sets a limit on how much Indian funds can invest internationally. This limit is set at US$ 7 billion for the Indian mutual fund industry. This limit was reached a couple of months ago.

Since then, mutual funds cannot accept new money.

This works slightly different for ETFs. ETFs tracking global indices are still traded on the exchange. However, they cannot grow their AUM. Effectively, there is transfer of ownership from one party to another on the secondary markets. But, there is no net inflow into these funds.

How does that impact us? Primarily, because of demand-supply mismatches, and the difference between the underlying asset base and what is traded on the stock exchanges, there can be differences between the price and the NAV of any international ETF.

Say an ETF is trading at a 10% premium to its NAV, and you buy it. At a later point in time, if the gap vanishes because of prices coming down, you will end up losing money despite the markets being stable. This price risk is what we want to avoid.

What next? We will wait for the RBI to enhance this limit - and it will at some point. Till then, we are getting rid of exposure to international equities, and instead re-investing that in Indian equities.

Why keep everything else the same?

We made a few changes in the January 2022 rebalance, based on market conditions.

  1. We increased the exposure to large caps and reduced the exposure to mid caps

  2. We moved from 10-year government bonds to 5-year government bonds

  3. We added exposure to corporate debt and SDLs (State Development Loans)

These changes were primarily to accommodate for:

  1. Increased risk aversion in the markets because of global macro events

  2. Possible central bank policy reversal in the form of interest rate hikes, which will lead to shorter term bonds doing better than longer term ones

  3. Lower expected yield from government bonds, and the need for some credit risk exposure to make up for the lack of yield

We are happy with these changes and think the current environment deems the above composition appropriate.

What Next?

Several things have happened over the last month that makes us positive on equities.

  • Hopes of a ceasefire are up

  • Global commodity prices seem to be cooling off a little

  • India has started buying Russian crude at discounted prices

  • The RBI’s stance remains pro-growth and it deems inflationary pressures to be transient

That said, India has been seeing a lagged effect because of elections, and prices are moving up across the board. This may hurt both demand and profits for corporates. However, the markets have been discounting this because of an improving situation globally, and pockets of underlying strength, which are either determined by domestic factors, government spending, or a post-COVID normalcy.

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