How to Vaccinate Your Portfolio to Protect Against Future Covid-19 Waves

It has not been an easy ride for anyone in 2021. Disturbing visuals and messages for medical help on social media have dominated the year. Because of state-driven lockdowns, worries about damage to the economic recovery have started doing the rounds. Discussions surrounding derailment of India’s growth story have made financial markets ill. So much so that by April 20, the S&P BSE Sensex had declined by 7.3% from its March peak of 51,444.65 points. Even though it has recovered from that level, it still remains down by 4.4% as on May 11 from that peak.

This has had a direct impact on investment portfolios, possibly including yours. Due to the prevalent uncertainty, volatility has plagued equity indices, resulting in some individuals deciding to pare down their holdings or exiting the markets completely. The troubling aspect of the second wave of the pandemic caused by the novel coronavirus is that another one may be on its way.

In this time of distress, we intend to offer you useful advice on how you can protect your portfolio from any future Covid-19 wave or similar unprecedented events.

Points of action to protect your portfolio

• Bolster your emergency corpus – 2020 had taught us that it is important to have an emergency corpus. Its intent is to serve as a backup in case of emergencies and it has to be separate from regular savings. The event where you need to dig into your emergency fund has to be impactful enough that it can’t be funded by traditional sources. Talking about its size and sources of inflow can be a topic unto itself. But the simplest way to build or boost your emergency corpus is to reduce discretionary expenses.

If you’ve never had such a fund before or you’ve depleted it last year, it is crucial to fund it on priority. Though this point does not directly do anything for your portfolio, it is important because in case of an emergency, if you don’t have such a fund, you’ll be forced to liquidate some of your holdings which, given unfavorable market conditions, could mean selling at a capital loss. Having this corpus will reduce the need for you to force-sell your invested money.

• Focus on capital preservation – In these times of heightened uncertainty, it is important to preserve your money. This is specifically true with regards to the money you may be investing for your retirement. We’ll talk about what to do about non-retirement long-term investments later in this article. Let’s focus on your short-term investments and retirement corpus in this section.

If you have equity investments for short-term goals and they are in profit – even if marginally – it is best to sell those securities now. There is some possibility that they might rise further in the near future, but given the market volatility, it is better to sell those holdings right now because you intend to use the proceeds soon.

As far as retirement money is concerned, if you still have more than 15 years to your retirement and you’re invested in a retirement plan which invests over 45% of your money in equities, it is better to shift to a plan which limits your equity exposure to 30% or lower. The closer you are to your retirement, the lower your equity exposure should be at this time. You can change this in a year or two if market conditions improve but at this juncture, it is better to be safe than be sorry later.

• Emphasize diversification – If there was ever a time to see the benefits of diversification first hand, this is it. The S&P BSE Sensex has fallen by 4.4% from its highs in early March to May 11. Meanwhile, the S&P BSE Midcap, which was down 6.4% between early and late March has recovered and is down only 0.2% from early March to May 11. The S&P BSE Smallcap has performed even better. From its lowest point seen on March 25, it has actually risen by 12.7% as of May 11. From early March, the index has grown by 7.2%.

What this example shows is that even in highly uncertain times which are rife with volatility, there can be pockets in the stock market which outperform. It reiterates the fact that even under the same circumstances, market segments can react differently.

The one thing no one can predict is which market segment will weather the market storm better than others. Because of this, you should not only diversify across asset classes like equity, fixed income, commodities, gold, and real estate, you should also diversify within these asset classes. For example, given your life stage and risk appetite, you can invest in stocks and mutual funds from the large, mid, and smallcap space among equities. Similarly, you can invest in bonds of various maturities and issued by different companies or use mutual funds to make use of different debt strategies.

Diversification can help your portfolio avoid a deeper dent than otherwise.

• Maintain sufficient liquidity – Maintaining liquidity in trying times is crucial for your portfolio. When volatility is high, there are high chances that liquidity dries up. This means that if you need to sell your holding at such a time, you’ll either have to accept a significant discount on your desired selling price or be unable to sell. This is not to say that you should move your long-term investments to more liquid instruments but to ensure that a higher percentage of your portfolio is invested in more liquid securities. For example, among equities, blue chip and other large cap stocks are considered more liquid than small and midcap stocks.

Further, if you have an investment which has just matured or is about to mature, you can invest its proceeds in liquid securities like liquid mutual funds or even consider arbitrage funds instead of committing them to a relatively illiquid offering.

• Review your portfolio in light of goals – This aspect of the overall vaccination of your portfolio is focused on non-retirement long-term goals. Take cognizance of those holdings which are beyond the capital preservation and liquidity aspects detailed earlier in this article.

This is a good time to relook at your portfolio and revisit your goals. This will help you either attest your goals or reset them in case you haven’t done it in a while. An attestation of goals will calm your nerves and remind you to stay the course because the pandemic will not last long enough to outrun your long-term goals. On the other hand, if you wish to pull some goals forward or push others further back than you originally thought, you can rejig your portfolio somewhat to match new goals or new timelines for old goals.

Those who need to step out frequently and meet many people in the course of their jobs are much more exposed to Covid-19 than others. Similarly, your portfolio is exposed to the whiplash the virus can cause to the broader economy. While vaccine and slot availability will determine when you get your shot, your portfolio does not need to wait for any such event. So get your portfolio vaccinated now and breathe easy!