After run-up in precious metals, what steps should investors take?

Equities: Largecaps reasonably valued

Largecap funds have delivered a negative return over the past year. Returns from midcap and smallcap funds are in single digits.

The sharp correction in March, driven by global risk-off sentiment and foreign portfolio outflows, moderated headline valuations from earlier highs. But valuation comfort, experts say, remains uneven across the market.

“Largecaps and select cyclicals now appear more reasonably priced after the correction,” says Shreyas Develkar, head-equity, Axis Mutual Fund.

Midcap and smallcap funds led the recovery in April.

Domestic capital expenditure and infrastructure momentum continue to support cyclicals such as capital goods, power and real estate.

Elevated crude prices pose asymmetric risks. “While they will benefit upstream energy names, they will put pressure on downstream and fuel-intensive sectors,” says Develkar.

The market’s trajectory will depend on how earnings pan out. “We expect earnings growth in the early double digits in FY27, though the trajectory is likely to be uneven across quarters and sectors,” says Develkar.

Debt funds: Inflation trajectory will determine returns

The United States (US)-Iran war, higher crude oil and gas prices, a weaker rupee, and expectations of a below-par monsoon have affected inflation expectations, causing yields to move up.

“Longer maturity debt funds get affected more by yield movements due to their higher modified duration, which acts as a multiplier on market movements,” says Joydeep Sen, corporate trainer, financial markets, and author.

On the positive side, accrual levels have improved. “Improved accrual levels can support the performance of debt funds in the future,” says Sen. If yield levels do not rise further, debt funds could benefit.

A larger-than-expected negative shock from oil prices and inflation, however, could push yields higher and pull down returns.

Investors must maintain allocation to debt funds for diversification. “The performance of the equity market since October 2024 offers a clear rationale for why allocation to debt funds is crucial,” says Sen.

According to him, funds with a portfolio maturity of around two to four years look attractive. “Current accrual levels in this maturity bracket are relatively attractive. If yields rise further, this maturity bracket may not be hit as badly as long-duration funds,” says Sen.

Investors should follow the principle of duration matching while selecting debt funds. “Instead of trying to time the market, investors should match their investment horizon with the portfolio maturity of the debt fund. Doing so automatically takes care of market cycles,” says Sen.

Precious metals: Avoid going overweight

Gold has delivered high returns over the past year. “Global uncertainty, fiscal imbalances in the developed world, and the weakening of the dollar benefited gold,” says Chirag Mehta, chief investment officer, Quantum Asset Management Company (AMC). Central bank demand has also been strong.

Real interest rates are a major long-term driver of gold prices. As they move lower, demand for gold rises.

“Inflationary pressures arising due to high energy prices have reduced the possibility of interest rate cuts. However, rate hikes may also be difficult due to the high debt levels in developed economies,” says Mehta.

Geopolitics and uncertainty could lead to stagflationary conditions (slow growth combined with sticky inflation). “Such a scenario has a high probability of playing out. Gold tends to do well in such conditions,” says Mehta.

The dollar has a high probability of declining over the medium to long term. “A weaker dollar could lead to greater diversification of reserves and investments into gold,” says Mehta.

Investors should maintain a 10-15 per cent allocation to the yellow metal amid the current stressful macro situation.

Silver funds have delivered more than 170 per cent over the past year. This calls for caution. After the recent price run-up, many substitutes have begun to emerge, especially in solar applications. If the global economy slows meaningfully, industrial demand for silver could also fall significantly.

Silver tends to move in tandem with equities during periods of market stress. Gold serves as a better hedge in such situations. Allocation to silver should not exceed 5 per cent of the portfolio.

Rebalance your portfolio

Rebalancing helps correct the drift in asset allocation caused by movements in different asset classes.

“Portfolios can move away from their strategic asset allocation if some asset classes outperform others,” says Vishal Dhawan, founder and chief executive officer (CEO), Plan Ahead Wealth Advisors.

Besides strategic rebalancing, investors may also need tactical rebalancing to adjust to changing market valuations when an asset class becomes too cheap or too expensive. Investors also need to rebalance among sub-asset classes, such as largecap, midcap and smallcap funds within equities.

Rebalancing also becomes necessary as investors approach a financial goal. They should shift money from aggressive to defensive assets.

Over the past year, gold and silver have outperformed domestic equities and debt. Many investors whose portfolios adhered to a strategic asset allocation a year earlier would now be overweight on gold and silver relative to their strategic allocation.

“Such investors should reduce their exposure to these precious metals. The money obtained from partial profit booking should be allocated to domestic equities and debt,” says Dhawan.

Do not exit completely. “Maintaining allocation to gold helps investors achieve foreign currency-denominated goals, like international education or foreign travel, by countering the tendency of the rupee to weaken against the dollar,” says Dhawan.

Prime Minister Narendra Modi recently urged Indians not to buy gold jewellery for a year to save foreign currency and mitigate pressure on the current account deficit.